Trusts Outline

Trust--An arrangement where legal title is in one person, and equitable title or interest is held in another person.

Big sales pitch is to avoid probate, but in states where the UPC has been adopted a trust is not needed to avoid probate.

The Creation of Trusts

I. Intent

A. Express trusts--Created by some manifestation of intent by the settlor.

B. Resulting trusts--Based upon an inferred or presumed intent of the settlor.

C. Constructive trusts--Established by court action to work justice, without regard to the intent of the parties.

D. Three parties involved in creating a trust:

1. Settlor or Trustor--The person who creates an express trust and furnishes the trust property.

a. Settlor must intend to create a trust at the time the trust is established.

(1) When a settlor makes a less formal disposition of property, she may have intended an absolute gift, a trust, an agency a bailment, an equitable charge, or another relation.

b. Once established, the trust terms as defined by law and in the trust instrument control.

2. Trustee

3. One or more beneficiaries.

E. DeLeuil's Ex'rs v. DeLeuil (1934) - Father wanted to provide for his incompetent daughter. F opened a safe deposit box in D's name (he already had his own). Most stock was still in his name--unendorsed to D. In a desk drawer, F left a key with a tag with instructions to take this and add it to your trust.

1. A trust is established when it is clear, from all the circumstances, that the settlor, during his life, made some external manifestation of the intent to pass a present interest in the subject matter of the trust to a beneficiary.

2. Must find that it was an inter vivos gift to create a valid trust.

3. Gifts of personal property have to be delivered.

4. Trustee has to receive delivery.

a. There is a delivery by placing it in the safety deposit box with intent to give D rts.

5. Intention to create a trust--To impose duties to do something (F's intent to give what was left to his D)

a. Have to create an interest in a beneficiary.

b. Series of conversations with the bank helps establish his intent.

6. Magic words such as "in trust," "trustee," need not be used to manifest an intention to create a trust.

7. Settlor must manifest subjective intent by objective expressions.

a. However, words and conduct may outweigh written documents as evidence of intent.

8. Some statutes allow the creation of voluntary trusts by any words or acts which manifest with reasonable certainty the settlor's intent to create a trust.

9. The expression of an intent to create a trust immediately should be distinguished from:

a. Indication of contemplation of the creation of a trust in the future, and from

b. A statement that a gift of the legal interest in property is to be made or has been made.

F. Ponzelino v. Ponzelino (1947) - Dispute between husband and wife after divorce. Husband claimed that he, as trustee, was not represented in the divorce ct. Husband had uncontrolled discretion. Ct. held no trust created.

1. A trust is not created unless the settlor manifests an intention to impose upon the transferee duties which are enforceable in the courts, and it is elementary that no enforceable duty is created where a trustee is granted wholly unlimited discretion in his administration of the trust.

2. Husband had no intent to create a beneficial interest.

3. A trust cannot exist without someone to enforce it.

G. Young v. Young - Brother died leaving two envelopes containing bonds which were to be turned over to his two brothers at his death. The bonds were reserved in the brother who died until his death and were then to be conveyed absolutely to his two brothers. The administrator of the estate argued that the bonds had to pass under the will. The brothers argued that the letter created either a valid gift or a trust. The administrator argued that the letter was ineffective to pass any interest since there was no delivery (either actual or constructive) of the gift and no trust intent was evidenced. The ct. held that the donor must be shown to have had some intent to create a trust.

1. Equity will not act to reform a defective instrument into a trust when no intent to create one is evidenced and no consideration is involved.

2. He tried to create a legal remainder and failed in so doing.

a. He did not part with possession. There was no transfer of personal property or delivery.

3. He didn't intend to create a trust.

4. Promise to declare trust held valid declaration of trust or specifically enforceable when supported by consideration.

5. If it is intended to take effect by transfer, the ct. will not hold the intended transfer to operate as a declaration of trust, for then every imperfect instrument would be made effectual by being converted into a perfect trust.

H. Thompson v. Whitaker Iron Co. (1895) - Iron delivered, but not accepted because didn't comply with contract standards. Defendant co. stated that they would hold iron for plaintiff. 12 yrs. pass and then seller sues in equity claiming the iron was held in trust. Ct. held no trust because there was no intent.

1. To find that a trust has been created, the trustee must have acquired legal title to the property as opposed to a bailment which involves possession only.

2. More like a bailment--title remained in the hands of seller.

3. For a trust, title must pass.

4. If it were a trust arrangement, because of accounting the statute of limitations is tolled.

5. To establish an express trust it is essential that the legal title be transferred to the trustee.

6. Calling a bailment a trust will not convert it into such.

7. The trustee has title; the bailee does not.

a. Bailment is based on a consensual relationship and can only involve personal property reduced to possession.

b. A trust can be created without the consent of the trustee and can involve possessory or nonpossessory interests in real or personal property.

c. The trustee can transfer good legal title to a bona fide purchaser; the bailee cannot.

8. Guardians, conservators, custodians and committees for incompetent persons are fiduciaries, but not trustees.

I. Merton v. O'Brien (1903) - Action to establish a trust. D took certain real property as a devise from his father subject to a lien by P for certain cash legacies which D was to pay him. D held property for 20 yrs. and never paid cash legacies. Ct. held no trust.

1. Where one holds land subject to a charge thereon in favor of another, a trust will be imposed to that extent of that charge if and only if, the trust involved is an express or acknowledged one.

2. The legacy was a personal obligation.

3. He was not required to use it to satisfy the lien.

4. It was just a lien, and time expired.

5. If it is a fixed sum, then it's usually found to be a debt and not a trust.

6. If amount is not required to be paid out of the trust property, it is held to be an equitable charge. An equitable charge arises where a grantor transfers property to another in fee, but subject to an obligation to pay a certain sum to a third party.

a. The donor of a charge may impose liability in equity to pay only out of the income, or only out of the capital of the property given, or the donee may be subject in addition to a personal liability at law if the donor intended him to be so liable.

b. The donee wins absolutely the portion of the property given which is not needed to satisfy the charge.

J. Comfort v. Cantrell (1941) - He left the property to her as sole owner and the request was merely that, and she didn't have to fulfil any legal duty. Had the court required her to fulfil this request it would create a trust with her as the trustee. Look to the intent of the grantor to see who he intended to benefit. Word of request don't create sufficient intent.

1. Mere precatory words (i.e., expressing a wish or desire) in a will are not sufficient to create a trust where clear and certain words manifesting a contrary intent are also present.

a. Words must be given their ordinary meaning.

b. Cts. may hold that where more than mere precatory expressions are involved a trust has been created.

c. Evidence of prior fiduciary relationships may also permit creation of a trust from mere precatory expressions.

2. Some cases give binding effect to words of request or desire, especially when hardship or inconvenience would otherwise result to one having an ethical or moral claim.

3. Precatory words addressed to an executor are sometimes treated as creating a trust, even though they would not have that effect if a mere legatee were concerned.

K. Colman v. Colman (1946) - There was no intention of the grantor to create a trust. Court holds it will not hold the imperfect transfer as a trust. Must have subjective intention and objective evidence must be solid. Can't go back after the fact and try to make the transaction into something it was not at the creation of the transfer. The intent wasn't there at the time of transfer.

1. An express trust, unlike a constructive trust, is created only if the settlor property manifests an intention to create a trust and an abortive attempt to create a trust by a particular method will not be construed to be a trust on a different theory.

2. General rule--The settlor of a trust must hold title to the res of the trust at the time he creates it, for a trust to be valid.

a. If there is no res, there can be no trust.

b. A mere expectation may not be the res of a trust.

c. However, future profits to which a settlor has potential possession may be the proper res of a trust.

L. First Federal Savings and Loan Ass'n v. Baugh (1974) - Totten Trust Case. Does the Wife's estate get the money, do the children get the money, does the bank get the money? Court holds that the it is a valid trust and the children get the money, the wife never had it to pledge on the loan to the bank.

1. Accounts opened by a person as trustee for another, with the trustee's own money, may not be encumbered by anyone other than the beneficiary following the trustee's death.

2. General rule is presumption that depositor intended to create trust and that presumption is rebuttable by those who intend to challenge. Question is: what is the intention of the depositor at the time of the creation of the account? If the intent was there then the trust will be valid.

3. Absent a formal trust instrument, a Totten trust requires clear and convincing evidence of settlor's intent to create a trust.

M. Savings Account Trusts

1. Totten trusts--open an account in a financial institution and deposit money in the account in his own name as trustee for another person. Ordinarily, the depositor intends to retain the right to withdraw the funds to probate processes.

a. Such accts. are commonly referred to as Totten trusts, but are also called savings account trusts or tentative trusts.

b. Because the acct. card signed by the depositor ordinarily does not contain language expressing the usual elements of a formal trust, questions arise regarding the intention of the depositor.

c. A ct. could also find that the trust is primarily testamentary in nature, and is thus an invalid attempt to avoid the Statute of Wills.

d. The depositor has access to the funds during his life and can revoke the account in whole or in part by withdrawing the funds.

e. If the beneficiary of a Totten trust dies before the depositor, the trust terminates and the funds become the sole property of the depositor or his estate.

f. Cts. have frequently held that statutes create a presumption that the beneficiary owns the funds remaining at the death of the trustee, rebutted by appropriate evidence such as fraud, undue influence, or breach of a fiduciary duty.

g. In states that uphold Totten trusts, the statutory requirements, rather than actual intent, may control.

h. The terms of a trust account agreement may be held to defeat the Totten trust even in a state which generally recognizes the Totten trust theory.

i. Totten trusts, along with joint bank accts., payable on death (P.O.D.) accts. and similar arrangements with financial institutions, are often called will substitutes.

j. Even when upheld as trusts, savings acct. trusts may be subject to the claims of creditors, the surviving spouse's forced share, and federal estate tax.

II. Trust Property

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

B. Trust property can be real or personal, legal or equitable, tangible or intangible.

C. Undivided interests and future interests can become the corpus of a trust, so long as they are transferable as can interests owned in severalty or interests not presently vested in enjoyment.

D. A subject or corpus of a trust estate is absolutely essential, not merely to the validity of a trust, but to its existence.

1. Courts will supply a trustee.

E. Problems usually encountered when creating a trust include:

1. Attempting to create a trust in property not yet in existence or not yet owned by the settlor, so called future property, or

2. Attempting to create trusts of property that is presently existing and owned by the settlor or trustee but not clearly identified or segregated from her other property.

a. Frequently arises upon the insolvency or bankruptcy of the party who is alleged to the trustee

F. Brainard v. Commissioner of Internal Revenue (1937) - Appeal from decision ordering payment of a tax deficiency. P declared a trust in favor of members of his family, then entered into securities transactions, the profits from which he credited to the trust acct. Trust isn't created until the profits exist. When they exist they belong to him because he must transfer them to the beneficiaries. How to fix this problem:

1. One, manifest an intention to create a trust at that time. Transfer the stock into the trust fund, then the earnings would have belonged to the wife and kids. Problem is must be an irrevocable trust for him to get the income tax benefits.

2. Two, if there had been consideration and a contract to create a trust then the trust would be created upon the creation of the profits or the property which is the subject of the contract.

3. Rule of Law: Where a promise to declare a trust of property not yet in existence is unsupported by consideration, and the intention to hold the property in trust is not manifested until sometime after its acquisition by the declarant, the property is not received in trust and is therefore taxable to the declarant.

4. Must be property in existence or the trust must be based on an enforceable contract.

5. Under some states valid statutes allow the transfer of property which will come into someone's estate at the time of death.

6. An attempt to create a trust in property not yet in existence is ineffective unless supported by consideration--basically this is the rule.

7. An expectancy, however, may be conveyed into a trust.

8. Future profits may also be conveyed.

a. This can occur with underlying contract rights.

G. Debts As Trust Property

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

a. However, there can be no trust where the obligor is trustee of his own obligation.

b. A debtor may declarer himself trustee of some of his property for the purpose of paying the debt, but he does not do so by merely announcing that he holds the debt or the money in trust without identifying particular cash or a particular bank acct.

2. A settlor's check payable to a trustee for a named beneficiary creates a trust, but the res is destructible if payment of the check is stopped or the drawer dies before it is presented.

H. McKee v. Paradise (1936) - Suit to establish a preference in a bankruptcy proceeding. A debtor-creditor relationship was created by the company in setting aside a certain amount each month for an insurance benefit plan for employees and then failing to pay the proper amounts. Because the funds were paid to a bank account and were not segregated there is no trust relationship. The underlying relation was that of employer and employee. With respect to wages that the employee earned, the relation was that of debtor and creditor. What was a debt to the employee was also a debt to the association.

1. An employees' assoc. which is financed through company payroll deductions which in the beginning are transferred to the assoc. and thereafter are merely credited to its acct. by bookkeeping entries is not entitled to preference over other claimants in the event of the bankruptcy of the company.

2. Here, no trust res was established or fund segregated.

3. The property was never given up.

4. A simple promise to pay cannot be the subject of a trust, but a promissory note can be the subject of a trust.

5. Public utility customer deposits held to be debtor and creditor relationship.

6. An employee is considered a trustee of tax withholdings for the government under IRC 7501.

I. In Re Penn Central Transportation Company (1971) - Greyhound and Penn Central sold ticket for each other. Penn Central filed BK and Greyhound wanted to be in a trust relationship for $37,000 of ticket sales. Held that it was a debtor creditor relationship because there was no segregation of funds.

1. If a party may use funds collected for the benefit of another as its own or may commingle them in its accts., only a debtor/creditor relationship has been established between the parties.

2. Here, because the RR could use the funds for any purpose or commingle them, a simple debtor/creditor relationship rather than a trust was created.

3. Reclamation of property may be had in bailment cases or where a valid trust has been established.

4. When a corp. declares a dividend and deposits funds in a bank acct. to pay it, the corp. is usually held to be a trustee for the stockholders.

a. However, when the corp. makes the same kind of deposit to pay interest on corporate bonds, the deposit is not held in trust.

J. Busher v. Fulton (1934) - Clerk of the Court deposited money from a condemnation case in the amount of $69,000 to a bank account saying that it is proceeds of a case. The bank goes bankrupt. To constitute a special deposit, the authorities are generally agreed that the depositor and the bank, at the time the deposit is made, must intend that such deposit shall remain segregated and not be commingled with the general funds of the bank.

1. Three kinds of deposits:

a. General deposit - Repaid on demand, mingled with other money. No trust created. (What most of us have.)

b. Special Deposit - A bailment, bank acquires no property and derives no benefit from its use. Bailor retains title. Agree to give back the identical property.

c. Deposit for Specific Purpose - Designated to be applied to specific object. Neither general nor special. Title remain in depositor.

2. Rule of Law--In the absence of an agreement between depositor and bank that funds deposited should constitute a special deposit, that deposit is general only and is entitled to no preference in payment.

a. Need to show that both parties intended that the deposit remain segregated and not be commingled in order to have a special deposit.

3. Many cts. have held escrow deposits to represent trust relationships despite the problem of identifying a trust res.

4. Some cts. hold that if the mortgagee bank fails, the bank holds these required funds in trust for the mortgagor, despite the payment of interest.

K. Trusts in Bank Assets

1. Preference merely connotes the right to recover specific assets or the proceeds derived from specific assets before the claims of general creditors are satisfied.

2. Many of the cases awarding certain parties priority of access to bank assets proceeded on the theory of a constructive rather than an express trust.

3. Most states have now adopted legislation requiring that the trustee set up a security fund of described high grade investments pledged to protect such deposits. The securities must have a market value not less than the funds deposited, except that many statutes provide that no security fund is required to the extent that a deposit is insured by the FDIC.

L. Trust Doctrines in Bank Collection and Remittance

1. Trust doctrines were also controlling when a bank had taken funds for remittance or for the issuance of a letter of credit.

2. UCC 4-214 provides that the owner of an item submitted for collection shall have a preferred claim against a party which has received but has not yet made its own payment or settlement therefor.

3.  5-102, 5-103 & 5-117 provide that parties who have been issued certain bank credits, including letters of credit and credits requiring documentary demands for payment, shall be entitled to payment in preference over depositors or other general creditors of the issuer or bank.

M. Pierowich v. Metropolitan Life Ins. Co. (1937) - Action to reach funds allegedly held in trust. Insurance co. allegedly held life insurance proceeds in trust for P's two children until they reached age 21. Certain restrictions were placed on the policy for receipt of the funds. Wife wanted to get at the funds. Ct. held it was a contractual obligation, not a trust so wife could not get at the money.

1. Unless property is transferred from the trustor to the trustee and legal title is separated from equitable title, no trust exists.

2. The insurance company cannot release the money to the mom because of the trust even if the kids starve before they are supposed to be paid.

3. In some states, insurance companies may, by law, hold proceeds as trustees without a transfer and without segregating funds.

III. Trustee

A. Any natural person or other legal entity capable of taking title to property can receive a conveyance as trustee.

1. Although qualified to take title, some grantees may have to be replaced if they are incapable of functioning as trustees because of infancy or physical or mental disability.

B. Federal and State statutes disqualify from fiduciary service persons who have been convicted of crimes involving moral turpitude.

C. A trustee named in a trust instrument is free to accept or decline the appointment.

D. Acceptance is best signified expressly, but can also be implied by taking possession of trust property or by some other act that amounts to beginning the administration of the trust.

1. Cases have held that any interference with the property constitutes acceptance.

2. A person named as trustee will be held to have declined the appointment by implication if she fails to comply with the statutory requirements for qualification or if she fails within a reasonable time to do other acts necessary to the performance of the trusteeship.

3. When the same person is appointed executor and trustee under a will, acceptance as executor may be held to amount to acceptance as trustee also.

4. A trustee must ordinarily accept or reject the trust in its entirety as tendered, and may not accept on conditions or accept part of the trust property and reject the remainder.

E. Disclaimer and resignation, once accepted cannot be revoked.

F. The disclaimer of a non-personal sole trustee does not defeat the trust nor prevent its origin. The court will appoint a substitute.

1. The disclaimer of a cotrustee causes title to vest in the accepting cotrustees.

G. Since as trust involves duties owed by a trustee to a beneficiary in respect to certain property, it appears that a trustee is essential to the existence of a trust.

H. Any property can be property of a trust.

I. Estate of McCray (1928) - A trust does not fail because a trustee is not appointed. The court can appoint a trustee as long as there is evidence that the grantor intended to create a trust and there is property to be put in trust. The court appointed the executor of the estate as trustee. Here, the holographic will did not devise all of the estate. There was evidence of intent to create a trust. There was real property, but no trustee.

1. An attempted trust is not rendered ineffective solely by reason of the settlor's failure to name a trustee, since the court may appoint an individual or other legal entity to serve in that capacity.

2. Since the activities of a trustee are clearly defined and circumscribed by case law and statute, there is little danger that that court will, by its appointment of a trustee, contribute to the dissipation of the trust property.

3. The absence of a trustee in a deed of trust should not be fatal to the establishment of a trust, if the deed was delivered to the beneficiary or someone for her.

J. Wittmeier v. Heiligenstein (1923) - Although a deed is rendered invalid by the incompetency of the grantee, a valid trust may nevertheless be created, since a trust does not fail for lack of a trustee. Even though because of a state statute prohibiting churches from taking deed to property in excess of 20 acres, the beneficiary is still named and the property also exists. The deed is invalid but the trust is valid.

1. Other cases are an inter vivos gifts and there was no intent to create a trust thus the transfer failed. Here the intention to create a trust is evident.

2. The heirs of the person become the grantee and they must serve as trustee to the beneficiary. When H dies the heirs get property fee simple.

3. Restatement Trusts 2nd 43 provides the generally accepted rule:

a. Except as stated in Subsection b, if the owner of property makes a conveyance inter vivos of the property to another person to be held by him in trust for a third person and the conveyance is not effective to transfer the property, no trust of the property is created.

b. If the conveyance is ineffective only because no trustee is named in the instrument of the conveyance or because the person named as trustee is dead or otherwise incapable of taking title to the property, a trust is created.

K. Shaw v. Johnson (1936) - An attempt to create a trust is not defeated by the designated trustee's refusal to serve in that capacity. Decedent appointed a trustee who was not in existence when she died. She had revoked the trust with intent to create another one, but all of the paperwork did not go through before she died. The insurance company refused to accept endorsement to avoid double indemnity. Court held that decedent did everything in her power to create the new trust.

1. The decedent is deemed the trustee while she is alive, and her personal representative thereafter.

2. The lack of a trustee is not fatal to a trust as long as its subject matter, purpose, and beneficiaries are indicated with reasonable certainty.

L. First Alabama Bank v. Webb (1979) - The doctrine of merger does not destroy a trust naming multiple individuals as both trustees and beneficiaries. The doctrine of merger holds where a trust makes a single individual or entity both trustee and beneficiary, the trust is void and the trustee/beneficiary holds title in fee simple. In this case the trustees have obligations to lots of beneficiaries and merger need not apply. Mother created a trust naming her children as both trustees and beneficiaries.

1. The doctrine of merger holds that where a trust makes a single individual or entity both trustee and beneficiary, the trust is void ab initio, and the trustee/beneficiary holds title in fee simple absolute.

a. The reasoning is that where one person holds all legal and equitable title, the purpose and function of a trust is not being served.

b. When multiple parties are involved, however, they can owe duties to each other in their respective capacities.

c. Also, the types of cotenancies may differ between the legal and equitable titles.

2. Court held that trustees hold as joint tenants; whereas, beneficiaries hold as tenants in common.

a. The trustees hold for each of the beneficiaries not just for themselves.

3. When settlor named himself trustee, reserving right to income for life, right to withdraw the property, and right to alter, amend or revoke, there was nevertheless no merger of legal and equitable title, since the interest of the residual beneficiaries vested at the time the trust was created.

4. The court can remove a trustee and still enforce the trust if a serious conflict of interest arises because the trustee is also the beneficiary.

5. Partial Merger--When one trustee is also a beneficiary, the trust is valid but the trustee beneficiary may be disqualified from acting as trustee when her own interests are involved.

6. Wives of trustees have no dower interest in the land or dower of curtesy interest in a trustee's legal fee interest, since the trustee holds only bare legal title.

M. In Re White - (1) Mere dissatisfaction on the part of a beneficiary with a trustee's performance is insufficient grounds for the trustee's removal; (2) a trustee may resign if such resignation will not harm the trust. The court can grant permission to resign as long as it wouldn't harm trust. The bank is permitted to resign. Raymond can't be removed until beneficiaries can show harm, that he is an imprudent trustee.

1. Removal of a trustee is a drastic remedy.

a. Until such time as a trustee violates some fiduciary duty, he cannot be removed.

b. A trustee who has accepted the trust cannot resign except if c., d. or e. are met:

c. With the permission of a proper court; or

(1) Inadequate compensation is not a good enough reason.

(2) The court may impose a requirement that trustee resign in good faith and in accordance with fiduciary obligations.

d. in accordance with the terms of the trust; or

e. with the consent of all the beneficiaries, if they have capacity to give such consent.

N. If trust stated that all of the beneficiaries could agree to remove a trustee, then they could all do so together if they all concurred.

1. The settlor can provide in the trust instrument that vacancies in the office of trustee can be filled by the unanimous or majority action of the remaining trustee, the beneficiaries or any other designated person or persons.

2. NOTE: You should include conditions under which a trustee can resign and removal can occur when drafting a trust.

O. Gathright's Trustee v. Gaut - If a will appoints advisors to the executor, but it becomes impractical for the designated advisors to act, the court may appoint substitutes to serve in the place of those advisors designated by the will. The court appoints another person to act as advisor. The office of advisor was not made personal. She didn't say only this person can give advice. Here, neither of the designated advisors to the executor under the will were available. The will stated that if either becomes incapacitated, then any judge of the Jefferson Cir. Court could give consent to sell any real estate property or investments. The lower court held that a substitute could be appointed to serve in place of those advisors. Court of Appeals held that all of the judges have to refuse to act in the prescribed capacity before the court could appoint a substitute.

1. The desires of the testator will be implemented where they are ascertainable.

2. Courts, in the exercise of equitable discretion, will take necessary steps to insure the efficacy of a testamentary instrument.

3. These two related rules are liberally applied by the courts in order to work substantial justice.

P. The settlor, who has the prerogative of selecting the trustee, can also specify the circumstances under which the trustee can resign and the manner in which she shall be replaced.

Q. The cotrustees hold as joint tenants with right of survivorship.

R. If settlor has designated a successor trustee, then the trust will devolve upon the successor if the original trustee resigns, dies, or is otherwise unable to act.

1. The settlor can also provide that vacancies in the office of trustee can be filled by the unanimous or majority action of the remaining trustees, the beneficiaries or any other designated person(s).

a. In such a case, the courts usually hold that the successor trustee takes title to the trust property and gets the trust powers by virtue of the trust instrument and the appointment, and that a conveyance of the trust property to the new trustee is unnecessary.

S. If a government official or court receiver is appointed for an insolvent trustee, the trusteeship does not pass to the liquidator, even though he may receive title to the trust property.

T. When a trust instrument has made no provision for a successor trustee and a vacancy occurs through death or otherwise, the court must appoint a successor.

1. In the meantime, under the common law, the title to trust personal property vests in the trustee's executor or administrator, subject to the trust.

2. In some states there are statutes holding the title in abeyance or vesting it in the court on the death of a sole trustee.

U. When the court must appoint a successor, it has power to do so ex parte, at least on a temporary basis.

1. However, beneficiaries can make their wishes known.

V. If the trustee named is intended to be a personal trustee her disclaimer should be fatal to the origin of the trust.

W. A trust advisor is increasingly common.

1. An advisor is a fiduciary, subject to the court's control, if the trustee must act according to the advisor's direction.

2. If there is no such requirement, the advisor's power may only be beneficial.

3. Statutes of limitation applicable to trustees does not apply to advisor.

X. Custodian trustees--Have title and possession of the trust property.

Y. Managing trustees--Have the powers of management.

Z. One trustee may be given general supervisory powers over the other trustees, each of whom is trustee for one beneficiary.

1. Or an advisory board may be created for the trustee.

2. Or a board of "trust managers" may be created whose function is to direct the trustee, the latter merely having title and possession and performing ministerial duties.

AA. Uniform Gifts to Minors Act (U.G.M.A.)--Allows an adult custodian to manage securities or money for a minor even though the property was indefeasibly vested in the minor.

1. This Act limits liability of the minor and custodian, and grants custodians the power purchase liability insurance with custodianship assets.

2. Prior to the act, minors could disaffirm a contract.

3. The only way to retain control and protect a minor from mismanagement when making a gift for Federal gift tax exemption purposes was to comply with the more costly formalities of establishing a trust.

4. The U.G.M.A. solved these problems by allowing an adult custodian to manage securities or money for a minor even though the property was indefeasibly vested in the minor.

AB. Uniform Transfers to Minors Act (U.T.M.A.)--Allows custodial management of such property as real estate, automobiles, general partnership interests, and business proprietorships. These property interests expanded the potential for personal liability under the U.T.M.A.

1. To solve this problem, the U.T.M.A. limits the personal liability of the minor and custodian, and grants custodians the power to purchase liability insurance with custodian assets.

AC. Unlike a trust, a custodianship under the U.G.M.A. or U.T.M.A. is not a separate legal entity.

1. Because the custodian holds no title to the property, she is not a trustee.

2. Custodians are fiduciaries, with power to manage and invest the custodial property as would "a prudent person dealing with the property of another."

AD. The Uniform Custodial Trust Act (U.C.T.A.)--Provides a simplified method of property management for adults who are incapacitated.

1. Because the U.C.T.A. governs all of the rights and obligations of the trust relationship, a person may establish a trust by executing a simple statement that the property is being placed in trust under the U.C.T.A.

a. This may be done in a separate document or by notation on the existing title document.

b. Therefore, a person can transfer property of any kind as an adult beneficiary to another person as custodial trustee.

2. Unlike the beneficiary of a traditional trust or a custodial account, the adult beneficiary who is not incapacitated has full power under the Act to manage assets, receive property, or terminate the custodial trust.

3. The custodial trustee administers the trust only after the adult beneficiary has become incapacitated.

4. Unlike a custodian under the U.G.M.A., a custodial trustee under the U.C.T.A. holds title to the trust property.

5. This type of trust may be used by parents with incapacitated adult children, by adults leaving the country temporarily, or by young adults who have received property under the U.T.M.A. and want to continue the custodial trust as adults, as well as senior citizens planning for disability.

AE. Durable power of attorney--allows a person to appoint an agent with power which continues after the principal's incapacity.

1. Transactions by the agent are validated even after the principal's death if they are conducted in good faith and without knowledge of the principal's death.

2. Permitted by U.P.C. 5-501 to 5-505.

IV. Beneficiary

A. To create a valid express trust the settlor must sufficiently identify one or more beneficiaries (cestuis que trust) who can enforce the duties owed by the trustee and the beneficial rights created in the trust property.

B. The beneficiaries need not be named specifically if they are ascertainable from the description.

C. In contrast with a private trust, the beneficiary of a charitable trust may be indefinite because the attorney general will enforce the trust.

D. Morsman v. Commissioner (1937) - P established a trust with himself as both trustee and beneficiary, but the IRS assessed the trust income to Morsman personally. The income was to accumulate for 5 years and then to be paid to the settlor unless he should die in which case the income would be divided among his widow and issue or, if there were no issue or widow, then to his heirs. P was not married and had no issue. There was not a valid trust because no one was presently identifiable who could enforce the trust. P holds both legal title and equitable title, the doctrine of merger collapses the trust.

1. To have a valid trust, equitable title to the trust property must not only be separated from legal title, but also there must be a beneficiary who possesses this equitable title separate from the legal title.

2. When S has children the trust will spring into existence, no trust now, it is a trust in waiting or dormant trust.

a. No problem exists when a settlor creates a trust for settlor's living children and others later born, since living beneficiaries exist from the beginning.

b. A contract to create a trust for an unborn person when and if she is born is also enforceable.

c. Most states have now established a presumption that an adopted child is included in the definition of child, descendant, or issue. UPC 2-109.

d. Many statutes treat illegitimate children as children of the mother but not of the father unless paternity is established by law.

3. Problem with stating that the trust will go to his heirs is that until a person dies, potential heirs are not heirs.

4. Trusts will fail if no beneficiary is identified, or the beneficiary provided is not a legal entity or if the description of the beneficiary is vague and indefinite.

E. Kain v. Gibboney (1879) - Trust for benefit of community which she may become a member. Unincorporated association has no legal power to bring an action, thus no trust because they have no power to enforce the trust.

1. An unincorporated association, as distinguished from the members thereof, not being a legal entity, cannot be the beneficiary of a trust because it cannot hold legal title to property and does not have legal standing to sue to enforce a trust.

2. The grant might be interpreted to permit members of the community to take, but that may violate the rule of perpetuities.

3. The grant may be interpreted to permit members of the community alive at the date of decedents death, no violation of rule of perp. But this is strangled interpretation.

4. Not interpreted as charitable because it is far from evident that it is a gift for charitable uses.

5. If an unincorporated association is a charitable organization, a trust for it can be sustained as a charitable trust.

a. There is a statutory tendency to make certain unincorporated associations capable of receiving gifts.

F. Morice v. Bishop of Durham (1805) - Money in trust left to Bishop to be used at this discretion "to such objects of benevolence and liberality." Objects of benevolence or liberality are the purposes of trust. Benevolence qualifies it as charitable trust. Liberality is broader than charitable purpose. Court holds this cannot be enforced as private trust because there are no identifiable beneficiaries.

1. Under a private trust, there must be a beneficiary or class of beneficiaries capable of enforcing the trust and holding title, but under a public trust there need be no definite beneficiary because the attorney general can invoke the power of that courts to enforce the trust.

2. If it were to a known charitable organization it would qualify--i.e. orphans, sick, elderly-care.

a. Problem is the need to find an individual who could enforce the trust.

b. Most courts follow Restatement of Trusts 2d 123 which declares that no enforceable trust is created where the owner of property transfers it in trust for indefinite or general purposes other than charitable purposes, but it adds that where the disposition would not violate the Rule against Perpetuities, the transferee has the power to apply the property for such purposes unless the purpose is so indefinite that it cannot be ascertained what application falls within it.

c. Bottom line--if say that trustee must choose, then in trouble.

G. Clark v. Campbell (1926) - Settlor gave personal property to trustees to give to his friends as they should select. Held invalid, there was no ascertainable class of beneficiaries sufficiently defined.

1. To be valid, a private trust must provide for specific beneficiaries or a class of beneficiaries which is capable of a specific delimitation, and the term "friends," unlike issue, children, kin, brothers, etc., has no accepted statutory or other controlling limitation.

2. You do not have to name the beneficiaries, you can describe them, but not name them.

3. Identifiable class "friends" is not a class that can be identified like "children, issue, nieces and nephews" all those are okay. "Relatives" is no good either.

4. Mandatory power - must be a specifically identifiable beneficiary.

5. General power of appointment - If it could be called this, then it would be a power coupled with a trust and, therefore, trust principles would apply.

a. If there are takers in default, they would have a good chance to have the document deemed an appointment.

(1) By having takers in default, it shows that the grantor had in mind that may not exercise the power.

(2) If none are listed, then it shows intent that the trust must be exercised.

b. How do you know the difference? If there are takers in default the grant is a power of appointment, the class of takers are identifiable.

6. If trustee has discretion to select beneficiaries from it for noncharitable purposes, the trust fails.

a. While a trust may fail for indefiniteness of purpose, ascertainable beneficiaries are ordinarily enough to create an enforceable private trust.

H. The Power of Designation: Absolute Gift, Power of Appointment, or Trust?

1. In some cases, the person with the power is held to be the absolute owner of the property.

2. In some cases, the language referring to disposition by the taker was only precatory or a superfluous expression of one of the rights of ownership.

a. In other cases, the right to designate is held to be a general power of appointment, which the holder can exercise to confer ownership on herself, her estate, or anyone else she chooses.

3. Dispositions which effectively exclude any immediate beneficial interest in the person with the power of designation create either a power of appointment or a power in trust (power coupled with a trust).

a. Distinguishing: a power of appointment (if the holder of the power has an option) or a power in trust (if holder has a duty to exercise the power).

b. When the class of potential beneficiaries is definite, there is no need to distinguish.

c. The distinction becomes significant when the class of potential takers is indefinite.

4. No one can force the "donee" of a special power of appointment to exercise the power.

a. If holder does not exercise the power, the property goes to the takers in default of appointment if any, otherwise in equal shares to the class of persons among whom the donee could have appointed.

b. A power held in trust does not provide for takers in default of appointment.

(1) The trustee has an obligation to exercise her power, and can be compelled by the potential beneficiaries.

(2) If the trustee dies before exercising a power of selection that is personal with her, the property will be divided equally among the class of potential beneficiaries.

c. The donor of a power can specify that property should return in default of exercise by the donee to her estate.

5. There are many circumstances in which a disposition conferring great latitude of designation would be sustainable as a power of appointment, but invalid for indefiniteness if judged by the trust rules.

6. A power in trust is valid, but only as to those persons who can be identified.

a. If the power specifies designation from among an indefinite class, it will fail.

7. A power to appoint among identifiable and nonidentifiable persons would be classified as a nongeneral power of appointment under Restatement 2d of Property 11.1, 11.4.

8. Rest.Tr.2d 122--Although no enforceable trust is created when property is transferred in trust for the members of an indefinite class of persons, when the selection would not violate the Rule against Perpetuities the trustee "has the power" to convey the property to such members of the class as she may select unless "the class is so indefinite that it cannot be ascertained whether any person falls within it."

a. Generally not followed by most states.

b. Some American courts have been willing to validate the trust by splitting the unenforceable indefinite disposition from the enforceable trust provisions.

I. In Re Thompson (1934-England)- Honorary trust for the advancement of fox hunting. Court permits it because its purpose is reasonably ascertainable and the trustee wishes to carry it out. If the trustee does not perform the act, then the heirs of grantor can enforce it.

1. In the US, honorary trusts are not enforceable except: (1) saying of masses (2) perpetual care of gravesights (3) care for a specific animal.

2. Restatement of Trust 2d 124 provides that a specific noncharitable trust without definite or definitely ascertainable beneficiaries creates no enforceable trust, but the transferee has power to apply the property to the designated purpose, unless such application is authorized or directed to be made at a time beyond the Rule against Perpetuities, or the purpose is capricious.

3. A bequest of two riding mares and $14K with the wish and direction that money be used for the care of the mares according to the legatees judgment; held absolute gift.

J. Stoehr v. Miller (1923) - Was there a trust of property? During WWI parties took property in trust to protect each other from the government's taking of their property. An American citizen owned property in Germany and a German citizen owned property in the U.S. The U.S. went after the property under the Trading With The Enemy Act because the trustees were German citizens. The beneficiaries were not notified and then when they were, they renounced. You can't force the beneficiary to take the property. If the beneficiary renounces it is as if the trust never existed. The beneficiary has to decide whether or not he will receive the benefits. Therefore, the U.S. government had to give back the property.

1. Acceptance or rejection of the benefits of a trust by a beneficiary relates back to the time of creation of the trust.

2. Notice to the beneficiary by the settlor that he intends to create a trust, or has created one, is not necessary for the validity of a trust, although failure to give notice may indicate that the settlor did not have an intent to create a present trust.

3. In order that a named beneficiary may be the owner of an equitable interest in the trust property and the holder of a equitable claim against the trustee, the beneficiary's acceptance must be shown, and cannot be forced upon him without his approval.

4. At common law a beneficiary cannot disclaim a gift after accepting the trust, nor rescind her disclaimer. However, courts may allow withdrawal of acceptance or renunciation when no one has relied on the beneficiary's original decision.

a. Also at common law, the beneficiary cannot accept part and disclaim part of unitary gift unless the grantor clearly intended that right. However, many statutes now allow partial disclaimer.

5. The settlor may include in the trust instrument or will a forfeiture or contest clause. This clause provides that if the beneficiary contests the validity of the instrument, she forfeits her interest.

a. The clause is often enforces but construed narrowly.

(1) i.e.--It is unenforceable against the beneficiary if there was probably cause to believe a valid argument existed against the contested provision.

K. State laws dealing with renunciation - passing of legal title and federal tax in 2518 are different. Therefore, it is possible to renounce under one but not the other.

L. Town of Sharon v. Simons (1857) - Does a person not a beneficiary of the trust, but who receives a benefit from the trust, have the power to enforce the trust? A mother made her son trustee of a discretionary trust for the benefit of a daughter who was insane. The city had an obligation to take care of the daughter. The city does not have privity to enforce the trust. They may be able to force them to appoint a guardian or custodian who could enforce the trust.

1. Merely because the state has a statutory duty to provide support for the beneficiary of a trust does not make the state a beneficiary of the trust with the legal right to enforce it against the trustee.

2. The city is an incidental beneficiary and cannot enforce the trust.

3. The beneficiaries of a trust include only those persons upon whom the settlor intended to confer a beneficial interest under the trust, or persons who have succeeded to their interests.

4. Remember, the beneficiary of a trust is the one who is intended by the settlor to benefit from the trust.

5. Even though a trust is discretionary, a court could order the trustee to exercise his/her discretion.

a. If the trustee refuses, the court can appoint a new trustee.

V. Nature of the Beneficiary's Interest

A. Blair v. Commissioner (1937) - The life beneficiary of a trust assigns to children. If the grantor has the power to revoke the trust the grantor will be taxed on it. You can assign portions of your equitable interest if you so choose. The beneficiary owns an equitable interest in the property and when it is transferred the tax goes with the interest.

1. When the beneficiary of a trust assigns the right to receive part of the trust income to another person, the beneficiary is no longer liable for taxes.

2. The beneficiary owns the property, thus he is taxed on it.

3. While the right of the beneficiary originally was solely in personam against the trustee, it has become increasingly a right in rem and is now substantially equivalent to equitable ownership of the trust res.

4. A trust beneficiary's life interest should be distinguished from a legal life estate, which does not have the advantages that come from splitting beneficial and legal interests.

B. Coleman v. Coleman (1936) - Father in a writing made a trust for the benefit of his son and daughter-in-law in certain lots and monies, but the son & his wife had the obligation to give it back upon request. The son & wife argue that the father made an oral agreement. Because this was an alleged oral agreement, the Statute of Frauds controls. The beneficiaries have an interest in the real property, thus the oral agreement is not applied and the property must be returned to the father.

1. The Statute of Frauds applies to conveyances of equitable titles in land as well as to legal titles.

2. Beneficiary owns a property interest in the property which is the subject of the trust.

C. Curriden v. Chandler (1919) - D attempted to transfer the interest which he had in a trust as a beneficiary to his wife and child. The trustees were notified of the transfer. Now the trustees claim there was no delivery. The document was held sufficient in this case, physical delivery is not necessary. Writing under seal is equivalent and the grantor did all that he could do.

1. Delivery of a deed under seal acknowledging the gift of a beneficiary's interest in a trust is sufficient delivery of the property to render the transfer valid.

2. The beneficiary of a trust can normally transfer his interest in the trust any way he pleases unless there is a provision in the trust instrument which prohibits such conveyances.

3. Once an assignment has taken place and the trustee has been notified of the assignment and to whom it was made, the trustee is liable to the assignee if he pays the trust income to some other party.

4. If a beneficiary makes a gift of his interest in the trust, that gift must meet the requirements of a gift in general in order to be valid.

a. i.e.--When trust property is represented by some certificate, the certificate should normally be delivered also.

D. Moorestown Trust Company v. Buzby (1932) - Action to determine priority of liens. Successive assignees of the same chose in action both claim priority of their liens. Does prior notice to the debtor (testamentary trustee) of the later assignment without more, subordinate the rights of the earlier to those of the latter trustee. The first assignee of a beneficiary's interest has priority over all other assignees having the same interest (unless deception is involved). When the assignment is made to #1, the assignor gives everything away and there is no requirement of notice to the trustee to perfect the transfer of all interest to the assignor. The 2nd assignee is left without a remedy and must rely on the honesty of the assignor.

1. British rule--to establish priority the assignee must give notice to trustee provides protection for the 2nd assignee and the trustee--this seems the better rule.

2. American rule--when assignment is made to assignee #1, assignor has given away all that he has, and no notice is required. Therefore, assignee #2 is left without a remedy. Thus, the trustee is in a very vulnerable position.

a. This rule puts a heavy burden of inquiry on the assignee.

b. Rest. Contracts 2d 342 and Rest. Tr. 2d 163 state the American rule, but U.C.C.  9-312(5) adopts the first-to-file rule of priority for security interests in personal property.

3. Assignee #2 may be able to collect on assignor's assets if they exist.

4. Besides risking subordination to a prior assignee, the assignee of an equitable interest may also take subject to equities that are valid against the assignor.

5. Cobeneficiaries are in a fiduciary relation to each other. One beneficiary getting a mortgage from the trustee to secure performance of the trust maybe required to hold it for all the beneficiaries.

E. Spendthrift trust--Hillsborough County v. Dickenson (1935) - Suit to impress a constructive trust on assets. D illegally obtained county funds and converted them to this own uses. Constructive trust theory - title to property which is in the daughter is held by her in constructive trust because the money came from the county. Daughter holds property in trust for the father. When the county goes against the father they take everything he has, then they go after the property he equitably owns through the daughter.

1. A creditor's bill may reach the judgment debtor's equitable interests after a judgment at law has been obtained and is unsatisfied.

2. You can have a beneficial interest even though you are not named in the documents of ownership.

3. Beneficiary holds a property interest in the property of the trust (trust res or corpus).

4. Creditors can attach property which you own but they have a beneficial interest. The question is whether the person has a equitable interest in the property.

5. If the debtor's interest in a trust is not restricted by a valid spendthrift clause, it may be reached through a creditors bill.

6. Before a creditor's bill will be granted, it must be established that the remedy at law is inadequate.

7. Historically, the trustee's creditors could use legal process to levy on the trust property to satisfy the trustee's personal debts, although the beneficiaries could go into a court of equity to obtain protection of their interests.

8. Modern law and practice make it easy for beneficiaries to prevent that trustee's creditors from using legal process to take the trust property.

a. If the trust is not a spendthrift or similar trust the interest of the beneficiary may be used to satisfy his debts.

b. At common law the interest of the beneficiary of an active trust could not be taken by execution at law, but only by proceeding in equity.

(1) The standard remedy available in equity is the creditor's bill.

(a) Subjects the beneficiary's interest to the payment of his debts on the ground that the remedy at law is inadequate and that there are assets of an equitable nature which should be applied (an action at law, the procurement of a judgment, and the return of an execution unsatisfied are required).

c. Today, a judgment creditor may more frequently use levy and sale under execution at law without prior resort to equity proceedings.

d. Proceedings supplementary to execution are increasingly substituted for the creditor's bill. With these legal remedies the judgment creditor may discover or sequester trust assets in which the beneficiary has an interest.

e. The court may appoint a receiver to take charge of the trust property.

9. A trustee in bankruptcy succeeds to any assignable interest of the beneficiary. Rest. Tr. 2d 147.

F. Illinois land trusts - exception to the normal rule (of the beneficiary holding a property interest) where all title is held by trustee and beneficiaries have only a personal property interest. Purpose is to simplify title problems. How do they make this different? The trust document itself declares that the interest for the beneficiary is only a beneficial interest in personal property. Under doctrine of equitable conversion. Trustee is said to have legal and equitable title and the obligation to sell the property and give the proceeds to the beneficiary. The beneficial interest is that they have a right to the proceeds from the sale.

G. Trustee has obligations--Duncanson v. Lill (1926) - P & his wife are beneficiaries and hold a personal property interest and a right to the proceeds (right to the income). Duncanson transferred their interest in the land trust to Lill and entered into an exclusive agency agreement with him. P brought this action to compel specific performance of the agency agreement. Court held that it did not have jurisdiction to hear the appeal because a freehold was not involved in this action. The title to the trust property could not be affected, even though the beneficiary's interest could be assigned, because both the legal and equitable interests were held by the trustee.

1. When the trust instrument places the entire legal and equitable title to the trust property in the trustee, any actions by the beneficiary whereby he assigns his right to receive income from the trust property does not affect the title to the trust property held by the trustee.

2. Most states will recognize a trust instrument which places all legal and equitable title in the trustee even though state statutes provide that beneficiaries of a trust receive more than a personal property interest in the trust property.

3. If effective, a clause in the trust instrument making the beneficiary's interest personalty is particularly useful to promote alienability and facilitate sale and financing of trusts of widely held beneficiary interests.

4. In Illinois, courts have applied the doctrine of equitable conversion, which takes place when a trustee or other fiduciary receives real property with an immediate duty to sell it and distribute the proceeds to the beneficiaries; in such event the beneficiaries have a personal property interest only. Rest. Tr. 2d 131.

H. The Statute of Uses and Passive Trusts--pg. 114.

I. Chicago Title & Trust Co. v. Mercantile Trust & Savings Bank (1939) - Chicago title has a legal and equitable trust. They have obligations to sell the home within 20 years or when Harold tells them to sell. Harold holds personal interest. C#1 sues and Harold mortgages the property. Because Harold holds a personal property interest, the property cannot be converted into real property interest so the mortgage company wins. The Statute of Uses does not collapse because it is not a passive trust--the trustee has duties; to make a deed. In most states, C#1 would win, because the beneficiary has a real property interest.

1. A so-called Illinois Land Trust creates a valid and subsisting trust under which the interest of the beneficiary is personal property only and not real estate. Accordingly, a judgment against the beneficiary cannot be a lien on the land since the Statute of Uses operates only upon interests in real estate.

2. Except where the Statute of Uses has been modified to permit these kinds of trusts, their creation would be precluded in most states.

3. Some advantages of the title-holding trust, include:

a. Facilitates multiple ownerships since the record title is not affected by deaths, judgments, or other events affecting individual owners;

b. Enables the trustee to transfer clear title since the beneficiary's interest is not subject to dower, judgment liens, or similar restrictions applicable to real property;

c. Simplifies financing either by the trustee mortgaging the realty, or by individual beneficiaries pledging their personal property interests;

d. Permits the beneficiary to conceal his ownership of the property, since the only document placed on record is the trust deed, which only contains the number of the confidential trust agreement where the beneficiary's identity is disclosed.

VI. Formalities for Creation of Inter Vivos Trust

A. A person may create an express inter vivos trust either by declaration or by conveyance.

1. Declaration of trust--created by settlor simply making an explicit declaration that she holds certain property as trustee for another.

a. Before the declaration--settlor holds an entire ownership interest of the property.

b. After a valid declaration--settlor holds a bare legal interest in the same property and the beneficiary has the beneficial interest.

2. Trust by conveyance--created by appointing someone other than herself as trustee and conveying the property to the trustee.

a. The trustee then holds the legal interest and the beneficiary has the beneficial interest in the property (equitable interest).

3. Consideration, delivery and acceptance can be important in creating an inter vivos trust.

B. Leeper v. Taylor (1892) - Parents conveyed land to their son upon his written declaration to hold the property in trust for the parents, but the son moved on to the property while his parents were alive and failed to pay rent for his use. Court held that a valid declared trust was created because the beneficiaries can enforce and that once the conveyance took place, it was valid.

1. A settlor possessed of legal title may create a valid declared trust, and is such a case, neither transfer of title to another nor consideration is necessary to make the trust valid.

2. Delivery just means an intention of giving it away.

3. It is a well-established rule that no consideration is necessary to make a trust enforceable, if all acts essential to its creation have been performed. Once the owner of the trust property has placed the equitable interest in the beneficiary, the trust becomes enforceable. The question whether the settlor received value for his transfer is immaterial.

4. For a declared trust to be valid, nothing more than the manifestation of intention to create such a trust is necessary, unless the trust property is an interest in land, in which case a writing is required, or unless the disposition is in substance testamentary disposition, in which case it is necessary to comply with the Statute of Wills.

5. Although an oral declaration may create an inter vivos trust without delivery or consideration, the settlor must presently and unequivocally manifest an intention to impose enforceable trust duties upon herself as trustee.

6. When the settlor of a declaration of trust retains control, the court may inquire into whether the trust property was clearly identified or ascertainable.

7. The payment of consideration will be essential to the creation of an inter vivos trust in two circumstances.

a. But when a valuable consideration exists between the alleged trustee and cestui que trust, a court of equity may deem a contract to declare a trust as equivalent to an actual declaration, upon the equitable rule that what ought to be done will be considered as done; this is sometimes expressed in the formula that a valuable consideration will induce a court of equity to complete an imperfectly created trust.

b. Consideration is essential to the creation of a living trust when the sole trust property is a promise, and consideration (or a seal) is necessary to make it enforceable.

C. Hinton's Ex'r v. Hinton's Committee (1934) - Action by the committee of Nora D. Hinton, an incompetent, against her father's executor for a declaration of her rights in a 400 acre tract of land that allegedly passed to her under his will. Other heirs claim an interest in the property under the terms of an inter vivos deed of trust, whose validity is thus called into question. Pursuant to an agreement with the trustee, the settlor conveyed and recorded a deed in trust to real property to the trustee, but the deed was never actually delivered to the trustee and the trustee later withdrew as trustee. Once the trustee renounces, the grantor is the trustee. The grantor died. The court held that a trust won't fail for lack of trustee, that a trustee will be appointed.

1. There must be a delivery of the trust property or deed to the trustee in order to validate a trust created by conveyance, but actual delivery is not required if there has been a manifestation, by words or acts, on the part of the settlor to unconditionally part with dominion and control over the trust property.

2. Delivery is a manifestation for the deed to take affect immediately.

a. Can deliver to an agent (such as the county clerk in this case).

b. Here, sufficient without physical delivery, the grantor demonstrated an intent to be bound and relinquished control

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

4. No meeting of the minds in necessary between the grantor and the trustee to have a valid execution and delivery on the one hand or to the acceptance or disclaimer on the other.

5. The formalities necessary to pass title to realty or personalty to a trustee depend upon the nature of the property being transferred.

6. Usually title to a chose in action, if represented by a document, can be voluntarily passed to a trustee by delivery of the document with an oral statement of trust intent, even though the document is unendorsed and no assignment is executed.

D. Whitehead v. Bishop (1925) - Action to set aside a trust. The settlor executed an inter vivos conveyance in trust but he continued to use and exercise some control over the property during his lifetime. Daughter sues to set aside an alleged trust to create a public library or to benefit the board of education. Court held the property not delivered.

1. To create a valid trust by an inter vivos conveyance, there must be a delivery to the trustee by which the settlor loses the right to dominion and control over the property, and to the benefits of the property.

2. Delivery is necessary to transfer property to create a trust--doesn't require physical transfer of the property.

3. To establish delivery--could give actual papers or make of deed of gift (give a document which describes the property given).

4. If father had made himself trustee, he would have to show intent to transfer. He would have to put the property away.

5. Delivery is really a state of mind--really looking for the intention of the grantor.

6. A trust can be created by the delivery of unendorsed stock certificates when the settlor intends to vest title in the trustee.

7. Endorsing shares of stock in blank and placing them in a safe deposit box under the control of named persons whom the court later determined to be trustees established an express trust.

E. Farmers' Loan Trust Co. v. Winthrop (1924) - Under an established trust, the settlor gave the trustee the revocable power of attorney to collect funds due the settlor and put them in the trust, but the settlor died before all the funds due had been collected. H dies, she's going to get property when it is released from U.S. Trust Co. She gives a power of atty. to Farmers' to put the funds into the trust once it is released. The legatees under her will fighting over it with the remainderman under the deed.

1. When a settlor makes a gift in trust, he must manifest a present intent to effectuate a present gift which will operate to immediately establish a trust.

2. When the principal dies, agent's power of attorney dies also.

3. To solve the problem, if she declares herself as trustees and Farmer's as successive trustee. She also could have executed a deed of gift for Farmer's.

4. As the situation stood at her death, the power could have been revoked and she could have kept the funds herself.

5. A court of equity will not specifically enforce a gratuitous promise, even if an action for damages would lie. Where the trust has been incompletely created and it is without consideration, equity cannot create a trust where one was not in existence.

6. An incomplete act of trust creation by way of transfer is not treated as a declaration of trust because that was not the settlor's intent.

7. An agent may be trustee as well as agent for the same person, or she may as a part of her agency contract assume duties toward her principal with regard to property which is owned by the agent. If a trustee is subject to control by her beneficiary she is also an agent.

VII. Statute of Frauds

A. The Statute of Frauds does not invalidate, it makes unenforceable.

B. In deals involving real property, it requires a writing.

C. Most American Statute of Frauds legislation has no application to trusts of personal property, which can therefore be created without a writing.

D. The section which applies the Statute of Frauds to contracts not to be performed within one year does not apply to present trusts, which are not contracts, but would apply to a contract to create a trust in the future.

E. The Statute of Frauds applies to the sale of a beneficiary's interest in an Illinois Land Trust, even though the interest may be considered personalty for other purposes.

F. An exception which permits the use of parol evidence to prove trusts arising or resulting by the implication or construction of law.

G. The majority of American court s allow the trustee to keep the whole interest in the land when an oral trust is defeated by the Statute of Frauds.

H. Chace v. Gardner (1917) - Brother & sister given property by father. Brother transfers by warranty deed, without consideration, real property to his sister upon an oral agreement creating a trust. Sister dies after selling the property. Chace wants the executor of D's estate to pay, into a trust for his benefit, money which the deceased orally agreed to pay to him. Court decides that once sold it becomes personal property.

1. An oral agreement to hold personalty in trust for another is not invalid under the Statute of Frauds.

2. Can sever unenforceable parts of trust from enforceable part and enforce only the enforceable part. There has to be a way to distinguish the parts however.

3. If trust was originally personal property converted to real property, will still enforce.

4. If the opposite, the court will try to find a way to enforce.

5. Most courts hold that when the trust property is proceeds from the sale of land, the trustee's undertaking is severable. His trusteeship over the land itself is unenforceable because of the S of Fs, but when the trust property is converted to proceeds from the sale of the land, the trust is outside the S of Fs and is enforceable.

6. If the oral trustee of land sells it and later acknowledges orally that he holds the proceeds in trust, the trust will be enforceable.

7. If the trust res is originally personalty, and is later changed to realty whether by agreement or not, the trust is enforceable since its original status is controlling.

I. Holmes v. Holmes (1911) - P conveyed to brother real estate property, with an option to receive 10 more acres, under a parol agreement that there would be a trust. P asks for the property back, brother refuses. Brother had the same day written and signed declaration stating that he held the property in trust for the benefit of P. The court held that an express irrevocable trust had been formed and held for brother, as trustee.

1. An express trust may be proven by a writing signed by the trustee and if realty is involved this writing will be sufficient to take the transaction out of the Statute of Frauds.

2. A writing, signed by the trustee, that is separate from the conveyance, to be valid it must contain all the terms of the trust, although oral evidence may be used to clarify ambiguities.

3. Two or more writings may be used together if they are all signed by the same party or if some of the writings are unsigned, they may be incorporated into the one signed by reference or by physical attachment.

4. A lapse of time might make a writing insufficient. The writing should occur simultaneously or after.

5. The rule in this state is that a resulting trust can, and an express trust cannot, be proven by parol testimony.

6. Once he has delivered his deed the grantor of a absolute deed probably has no power to make a memorandum that will satisfy the statute.

7. Oral evidence of the contents of a lost memorandum may by sufficient.

8. Oral evidence has sometimes been admitted to identify trust subject matter when the writing described the property in an indefinite way and proof of the trustor's holdings would clarify the intent.

J. McKinley v. Hessen (1911) - D made an oral promise that would hold property in trust, and give it back upon request. This was an action to compel specific performance. Court held that the agreement could be enforced--that the purpose behind the S of Fs is to prevent frauds. There is a part performance exception.

1. When an oral agreement for the conveyance of realty has been proven and part performance has been shown by acts of the party seeking relief, the agreement may be specifically enforced by the courts.

2. The widely accepted rule is that part performance by the beneficiary is sufficient to make an oral trust enforceable.

3. The beneficiary's performance must be clearly referable to performance of the trust and not to some other explanation.

4. Courts differ on whether part performance by the oral trustee renders the trust enforceable.

K. Hays v. Reger (1885) - D attempted to prove that she is not liable for a debt incurred by Stumph, who was trustee of the property for P. P & wife, by oral agreement, conveyed certain property to Stumph to hold in trust for them. P & wife remained in possession of the property and paid the taxes on it. While Stumph held legal title to the land, he signed a note for goods and merchandise with D. D and another loaned Stumph money because the thought the property was his. Court held that the trust had been fully performed and that it could, therefore, be shown by P that the trust did exist. Because Stumph held only bare legal title to the property, D could have no lien on the property in payment of a judgment against Stumph.

1. On a trust has been executed and fully performed, the fact that a trust relationship existed may be shown even if the trust agreement were oral and the trust involved realty.

2. An oral trust of real property is not void, but merely unenforceable against the trustee or his successors in interest if they choose to raise the S of F defense.

a. The parties can still choose to enforce the trust.

3. But if the beneficiary of the oral trust expressly or impliedly holds out the trustee as the absolute owner, creditors of the trustee who extend credit to him on the strength of his apparent ownership can resist the performance of the oral trust.

L. Parol Evidence Rule

1. It forbids the use of oral testimony to contradict, vary, or add a missing term in a writing the parties have adopted as a full expression of their intent (unless there is fraud, duress, mistake or other grounds for reformation or rescission).

2. In its application to trusts, the rule means that a declaration of trust or deed signed by the settlor cannot be varied, contradicted, or supplemented by oral testimony or other extrinsic evidence. Rest. Tr. 2d 38.

3. The PER originates in the common law and applies to any attempt to use extrinsic evidence to contradict a writing.

4. The creation of some trusts may involve the application of both rules or possibly neither.

5. PER could forbid an attempted oral trust not governed by the S of Fs, if the attempted oral trust contradicted some provision of a written memorandum or instrument of transfer.

6. Like the S of Fs, the PER will seldom be a barrier when fraud, duress, mistake, or other such grounds allow relief through the constructive trust.

7. Similarly, the rule will not exclude oral evidence which challenges the valid existence of the instrument, such as evidence about a forged signature or affixed without any intent that the instrument be legally binding.

8. If a written conveyance recites that the transferee is to take the property "for his own benefit," the parol evidence rule bars evidence of oral declarations or other circumstances to show that he was supposed to hold the property on an express trust for another. But if there is no such recital that the transferee is to hold for his own benefit, then such parol evidence is admissible.

VIII. Wills Acts

A. A property owner's right to control the distribution of her property at her death by a will is a statutory right conditioned upon strict compliance with the wills act which requires certain formalities in execution of wills.

1. These formalities are designed to reduce the opportunity for forgery, perjury, fraud and mistake.

B. UPC 2-502 -- "Except as provided for holographic wills, . . . every will shall be in writing signed by the testator or in the testator's name by some other person in the testator's presence and by his direction, and shall be signed by at least two persons each of whom witnessed either the signing or the testator's acknowledgment of the signature or of the will."

C. A trust purportedly created inter vivos but not to take effect until the settlor's death is "testamentary" and invalid under the wills act unless it was created by an instrument which conforms to the requirements of the act.

D. When the settlor has reserved the income for life and extensive control over the management and devolution of the corpus, a trust is subject to validity scrutiny to see if testamentary.

E. The pour-over trust is an arrangement by which the settlor devises assets to a valid inter vivos trust she has previously established.

F. The motives for a pour-over trust are as follows:

1. Avoid publicity, since the beneficiaries of the inter vivos trust need not be identified in the will, or

2. Facilitate trust administration by consolidating all family assets in one inter vivos trust.

a. A single trust may be managed more economically, and if deemed an inter vivos trust would not be subject to the supervision and regular accounting procedures sometimes required of testamentary trusts.

G. Monell v. College of Physicians and Surgeons of San Francisco (1961) - Atty had an acct so that he could pay the decedent's doctor's bills. Atty told to pay the residue of acct to fiancee. Court held that atty was an agent and therefore the gift to fiancee was revocable until decedent's death.

1. An oral appointment to a representative that proceeds be turned over only upon the death of the appointing party is invalid.

2. Have to have intent to create a trust shown in the grantor.

a. Here, intended to create an agency.

b. The document made the atty an agent.

3. Likely that the attorney committed malpractice.

a. It was his obligation to tell executor about the account.

4. An attempt to assign life insurance policies to "the trustees to be named in my will" failed as an inter vivos assignment because there was no assignee identified during the life of the settlor. The assignment could not be given effect after settlor's death because the assignment was not executed with testamentary formalities.

H. Farkas v. Williams (1955) - Suit by administrators to obtain rights to 4 stock certificates. P retains vast rights--vote, sell, exchange, revoke or change beneficiary, if beneficiary died first collapses. Issues: did bene acquire a present interest? If so, was trust testamentary? Court said no, power to revoke or change beneficiary doesn't make it testamentary. Other powers are no greater than these.

1. Even though the settlor retains the power to revoke the trust and appoints himself as trustee, if the beneficiary obtains any interest in the trust before the settlor dies, a valid inter vivos may have been formed.

2. Court really looks at the formalities of the documents--that intent is clearly shown.

3. Court said beneficiary could assert the trust if P had tried to borrow on the trust.

4. Rest. Tr. 2d 57, which declare that inter vivos trust dispositions are not invalid for failure to comply with the requirements of the statute of wills merely because the settlor reserves a beneficial life interest, a power to modify or revoke, and a power to control the trustee as to the administration of the trust.

5. It is necessary that a beneficiary obtain some interest in the trust prior to the time the settlor dies or the trust will be considered to be a testamentary trust.

I. Gurnett v. Mutual Life Ins. Co. of New York (1934) - Action to declare a trust testamentary and, therefore, void, and to subject the trust res to debts of the settlor. Ames, the settlor, established a life insurance trust which Gurnett is attempting to have declared invalid so that the trust res can be used to pay Ames' debts. Trustee had few duties while Ames was alive, but once dead, they were given a great deal of work to do in administrating the nearly $1M worth of insurance policies. Creditors argue that the trust was invalid because it springs into existence upon death of beneficiary.

1. A life insurance trust is valid as an inter vivos trust even though the settlor retains a great amount of control over the insurance policies during his life and even exercises his power to revoke portions of the trust. The beneficiary of the insurance policy can also be designated as the trustee.

2. A contract of insurance, can be proper subject of a trust.

3. Most courts allow the settlor of an insurance trust a large degree of control over the policies during his life. Courts have held that the power to revoke, amend, and use the insurance policies in any way is not too much power to allow the settlor to have.

4. There would have been no question if he had named his wife and children as beneficiaries of his insurance proceeds.

J. Montgomery v. Blankenship (1950) - Any document or paper may be incorporated into a will by reference if it is in existence at the time of the execution of the will and is identified by clear and satisfactory proof. Woman made a will which incorporated the trust by reference. P argued that the trust was not valid inter vivos trust because the stocks had not been properly delivered to the trustee and the trust couldn't be considered a valid testamentary trust because it could not be incorporated by reference. Argue that incorporation by reference cannot occur because the beneficiaries can be changed during lifetime.

1. Any document or paper may be incorporated into a will by reference if it is in existence at the time of the execution of the will and is identified by clear and satisfactory proof.

2. The trust was revocable and could be changed but no changes had been made in the trust. The trust was therefore properly incorporated into the will.

3. Unless amendments are made with sufficient formality, the amendments won't be incorporated into the will, but the trust agreement will function as it existed at the time it was incorporated.

4. If a settlor-testator's power to amend or revoke is exercised with sufficient formality to qualify as a codicil to the will, the property will pass according to the effect of the amended or revoked trust instrument.

5. If the instrument of amendment or revocation was not executed with the requisite testamentary formalities, the property will pass according to the trust instrument as it existed at the time the will was signed.

6. A deed to a trustee may incorporate into itself a will which has not become effective by the death of its maker.

K. Second Bank-State Street Trust Company v. Pinion (1960) - Action seeking instructions as to the validity of an amendment to a trust. Settlors amended their trust agreement and their trustee, P, wants to know if it was valid. The amendment was not valid until four days after the settlors made a codicil to their will because it had to be approved by P. The court held that the amendments could not be recognized under the doctrine of incorporation by reference because the amendment had not become effective until after the codicils to the will had been executed.

1. Amendments to trust agreements that were made after the trust agreement was incorporated into the will may be effective under the doctrine of independent significance without qualifying under the Statute of Wills.

2. Doctrine of independent significance allows any subsequent act to be recognized even if it hasn't met the requirements of the Statute of Wills.

3. Casenote says that about 18 states have adopted the doctrine of independent significance in some form.

4. The theory of facts of independent significance, however, views the testamentary assets as simply augmenting the existing inter vivos trust without themselves creating any new trust relationship or entity.

5. UPC 2-512 -- "A will may dispose of property by reference to acts and events which have significance apart from their effect upon the dispositions made by the will, whether they occur before or after the execution of the will or before or after the testator's death. The execution or revocation of a will of another person is such an event.

L. The Uniform Testamentary Additions to Trusts Act

1. The Act is not based on either incorporation by reference or acts of independent significance and validates pour-over trust whether or not they are funded during the life of the testator so long as the written trust document is in existence prior to, or came into existence concurrently with, the execution of the testator's will. The Act also permits, among other things, amendments made to the trust after the execution of the will that is to be given effect.

2. Unless the testator's will provides otherwise, the property so devised or bequeathed:

a. Shall not be deemed to be held under a testamentary trust of the testator but shall become a part of the trust to which it is given and

b. Shall be administered and disposed of in accordance with the provisions of the instrument or will setting forth the terms of the trust including any amendments thereto made before the death of the testator (regardless of whether made before or after the execution of the testator's will).

3. A revocation or termination of the trust before the death of the testator shall cause the devise or bequest to lapse.

IX. Spendthrift and Related Trusts

A. The judiciary has held that an attempted restraint of a legal fee simple in invalid whether it takes the form of a promise of the grantee, of a "disabling" clause that purportedly deprives the grantee of power to alienate, or of a "forfeiture" restraint that purportedly specifies a gift over to another party if the grantee attempts to alienate. The courts have been somewhat more lenient with legal life interests, generally permitting a forfeiture type restraint, although continuing to prohibit the disabling type.

B. Broadway National Bank v. Adams (1882) - Brother created a spendthrift trust for his brother with a clause prohibiting creditors from attaching the income prior to it being paid to the brother. The trust is legal and the creditors cannot attach the proceeds. No direct access to the property from the trustee.

1. Any person having the rt. to dispose of his property may place it in trust for another as income beneficiary, and may directly provide that such trust income cannot be alienated by the beneficiary by anticipation (i.e. by assignment) and cannot be taken by the beneficiary's creditors in advance of its payment to him.

2. Idea is that transferor has a rt. to transfer to transferee whatever interest he chooses.

3. In the absence of a statute, a majority of cts. have given effect to spendthrift trusts.

4. Once beneficiary receives income, creditors can get at it.

5. The settlor has the power to create whatever kind of interest in another as long as it is legal.

C. Appeal of Mackason (1862) - Settlor tried to create a spendthrift trust with himself as the beneficiary. Creditors tried to reach the funds. This trust was ruled invalid because it removed his own personal liability. "The policy of the law will not permit property to be so limited as to remain in the grantor for life, free from the incidents of property, and not subject to his debts."

1. An owner of property cannot so dispose of it in trust for his own use, benefit, and support for life, as to put it beyond the reach of liability for his future debts.

2. This is majority view.

3. If a person provides consideration for the creation of a trust, he is the settlor, even if the trust is created by another person and, therefore, any spendthrift provision is invalid. However, spendthrift provisions which provide both that the beneficiary (who is not the settlor) cannot assign his interest AND that creditors cannot reach it, are upheld in majority of states.

4. When a husband creates a trust for his wife and at the same time the wife creates a trust w/ similar terms for her husband, the trusts are called "reciprocal trusts." Each beneficiary is treated as the settlor of the trust for herself, or himself so that spendthrift clauses are not binding.

5. A number of states have enacted statutes allowing creditors to satisfy claims from the settlor's interest in a spendthrift trust, even though the statutes otherwise validate spendthrift trusts.

a. Under these statutes judgment creditors may also levy on the retirement trusts of self-employed professionals.

6. Sherrow v. Brookover (1963) - Ohio is the only state that prohibits spendthrift trusts. Appeal from judgment upholding a spendthrift trust. A cred. of a bene. under a spendthrift trust attempted to reach that beneficiary's trust interest for payment of his debts. This case is the minority view. Under the majority view, when a spendthrift provision provides both that the beneficiary cannot assign his interest and that creditors cannot reach it, that provision is valid. However, such provisions are not valid, even under the majority view, when the settlor of the trust is also the beneficiary.

a. The owner of property cannot set up a so-called spendthrift trust to exempt such property or its income from the claims of creditors of a beneficiary of that trust.

b. With a discretionary trust--trustee can decide whether or not to give funds to beneficiary.

(1) The beneficiary has no enforceable rts., therefore when the income accrues it will be paid.

(2) If the beneficiary cannot enforce, the creditor cannot enforce either.

7. Variations on the Validity of Spendthrift Trusts (See pgs. 183-188 of text.)

a. Most states require Spendthrift trustee to pay child support payments.

8. In re Keeler's Estate (1939) - A trust fund was created, with its income to be used for the support of granddaughter, and she assigned her rights under the trust. She later said that her assignment was invalid because she claimed it was a spendthrift. Trust doesn't explicitly say it is a spendthrift trust. The assignment is void, trust document prohibits it. Ct. held: 1) not a spendthrift trust, but a trust for her support, 2) she could have assigned it and before it was paid, revoked it. Trustee would not be liable to assignee. Trustee will tell him to sue the assignor on the contract to assign the proceeds.

a. A trust for support, unlike a spendthrift trust, contains no express restriction on alienation of the beneficiary's rights and, the law implies and enforces such restrictions (i.e. prevents the beneficiary from assigning his interest or attachment by creditors) only to the extent necessary to carry out the purpose of the trust.

b. Support trust - trustee has obligation to see that support is maintained. All creditors are barred regardless of what kind of creditors they are.

c. This case illustrates the majority rule regarding support trusts and assignments under either spendthrift or support trusts.

d. Note, that a trust to "pay all the income" to a bene. "for his support" is not a support trust because there is no discretion.

e. If a trustee paid a person to whom the beneficiary assigned out of a spendthrift trust:

(1) constructive trust only if knew

(2) assignment is void, but a power of atty. is created.

f. Assignee cannot get at the assets of a spendthrift--can sue the assignor.

g. If money is pd. by trustee, the bene. cannot sue because he was acting on behalf of the beneficiary.

h. An assignment may be enforceable in K even if not enforceable under the trust.

i. Paying to an assignee is like a power of attorney analysis, until revoke the power the trustee is not liable.

9. Lineback by Hutchens v. Stout (1986) - Beneficiary eligible for government benefits such as medicaid or medicare. Discretionary trust, court refuses to order trustee to provide support because it is a discretionary trust. She wants trustee to pay for her nursing home care that the govt. cut off because she is the beneficiary of a trust for her support, health and maintenance. Court refuses to force trustee to provide for beneficiary. Ct. says that grantor stated 6 times that trustee had discretion. The govt. erred because she cannot enforce the trust.

a. A ct. may not order a trustee of a discretionary trust to make payments to or on behalf of the beneficiary.

b. Common problems today because people don't want trust used up in providing care where they are entitled to govt. assistance.

c. Whether the state can reach a trust depends on whether the settlor intended to establish a trust for support even if the beneficiary is in a public institution, or whether she intended merely to supplement state benefits.

d. Recommendation is to carefully draft trust instrument to avoid support language and clearly identify the settlor's intent to limit use of the trust to supplementation of public benefits.

e. If the beneficiary of discretionary trust assigns her interest. The trustee does not have to pay, neither can creditors force the trustee to pay.

X. Charitable Trusts

A. A significant advantage of charitable trusts: they can be perpetual because they cannot be invalidated by the rule against perpetuities.

B. Now nearly all states have held that a court of equity has inherent jurisdiction to enforce charitable trust--rather than from the Statute of Charitable Uses.

C. Trusts for the relief of the poor, for education, and for the support of city, state or other government purposes are classic examples of charitable trusts. In fact, courts have upheld as charitable trust dispositions as vague as for "the poor people" of a named city, "for religious and educational purposes" and even a disposition "to charity," holding that the trustee can select a worthy recipient within the designated category.

D. Rest. Tr.2d 348 defines charitable trust as ". . . a fiduciary relationship with respect to property arising as a result of a manifestation of an intention to create it, and subjecting the person by whom the property is held to equitable duties to deal with the property for a charitable purpose."

E. Cts. have held that a trust to publish writings of testator and wife; writings had no literary merit failed.

F. Public trusts may be created by transfer to a governmental agency as trustee with a designated community as beneficiary.

G. The law favors charitable trusts with many advantages not available to private trusts.

1. Courts will apply liberal rules of construction in an effort to support charitable trusts. They also enjoy immunity from some of the rules regarding remoteness of vesting, suspension of the power of alienation and accumulations.

2. They receive many privileges with respect to income, estate, inheritance and gift taxation, and are frequently exempted from ad valorem property taxation.

3. The doctrine of charitable immunity may protect charities from tort liability.

4. The liberal cy pres rule, under which a court can modify trust to meet changing conditions, is applied to charitable trusts only.

5. The state, acting through its attorney general, is the enforcing beneficiary of such trusts.

6. The law has required that trusts involve some "public benefit" before they are admitted to the privileged characterization.

7. The burden of deciding whether a trust benefits society falls upon the courts instead of legislatures.

8. Since the subject matter of ten concerns speech, religion, or other fundamental rights, the cases have intriguing constitutional overtones.

H. In Re Huebner's Estate (1932) - The testator bequeathed a fund in trust, the interest of which was to be used to help educate "some boy or girl in music or art." The testatrix failed to state who the successor trustee would be or how he would be chosen, with no indication that the trust was to be for a "succession" of boys or girls.

1. To create a valid charitable trust it is essential that the trust be for the public benefit, either for the use of the entire public or for the use of a class of the general public which is indefinite as to names and numbers.

2. This is the majority rule.

3. Here the trust could not have been upheld as a private trust because there was no "definite" beneficiary when the trust was created (no identifiable beneficiary who could enforce the trust).

4. This trust would have been valid if it was perpetual and not just a one-time thing.

5. Charitable purposes include: education, medical care for the needy, etc.

6. The beneficiary is not necessarily the person who receives of the trust assets; if there's a possible conduit to the public then it can be found charitable.

7. There is confusion about how you define the public good. A substantial segment of the public should be benefitted. It can be an issue of who receives the benefit.

8. A private trust must have definite beneficiary. A charitable trust must have an indeterminate number of beneficiaries.

9. A court held that a bequest to help one or two young men through medical school without naming trustee was not so vague or indefinite as to be void, since court can make supplementary provisions.

10. Ct. upheld as charitable a trust disposition under which a young man chosen from Sylvia, Kansas would be provided an education to become a medical doctor, "upon his promise that he will return to the City of Sylvia and remain there for the purpose of practicing his profession." Ct. held that the benefits provided to the individual chosen were "but means to the desired end, i.e., to bring medical care to the inhabitants of a whole community" and that such care would obviously be of public benefit and within the concededly charitable purpose of preventing, curing or treating diseases or otherwise promoting health.

11. Courts have usually sustained the validity of trusts to award prizes to individuals who have made important achievements in medical science.

12. An attempted trust may be so indefinite that it fails as a private trust but so limited that it is invalid as a charitable trust.

13. Whether a trust for the benefit of an organization with limited membership is charitable depends upon its purposes.

14. Trusts to confer benefits on a relatively small, closed, and clearly ascertainable class have been held charitable when the recipients have been disadvantaged by some disaster.

15. Litigation on the charitable nature of such trusts therefore almost invariably involves questions of tax exemption or application of the doctrine of cy pres.

16. General recognition of the public importance of trusts to provide pension, death, disability, and accident benefits for employees has produced legislation validating such trusts and granting them important tax benefits.

I. In Re Henderson's Estate (1941) - The testator bequeathed a gift to the Eastern Star Homes of CA, which maintained a home for certain of its elderly members. The court held:

1. A gift or trust for the maintenance of an institution which provides care for the old is charitable if the group benefitted is large enough to make that gift or trust beneficial to the community, and this is true regardless of the financial condition of those receiving care, and regardless of whether or not those receiving care must contribute to maintaining the institution.

2. Contributions within a mutual benefit society (i.e., a group agrees to contribute--equal amounts into a fund to be used for the benefit of all) are not charitable gifts since they are not free contributions to assist others but only provisions for one's own benefit. But, if someone outside of such a society (i.e., one receiving no benefits from it) contributes to it, that gift is charitable if the fund is organized for a purpose beneficial to society (e.g., providing medical assistance to its members) and if the group is sufficiently large.

3. If members of the group are constantly changing then it may be deemed to benefit the public.

4. Also, it helped that only one in 500 can live in the home.

5. The case turns on the other benefits provided and that there is no contractual right to the benefits (especially between the donor and the charity).

6. The court said that even if the Home itself were considered in the nature of a mutual benefit society and hence non-charitable, the bequest to the Home, being for the purpose of aiding the aged, may remain charitable.

7. The central characteristic of a charitable trust--public benefit.

8. A trust for a profit-making institution can be charitable, but only if those profits are applied to charity.

a. As such, a trust to a charity hospital even if it charges fees is charitable, but a trust for a hospital operated at a profit is not charitable even if the hospital accepts some charity patients.

9. Charitable trusts can be limited under Mortmain Acts, but very few states have any limitations today on the amount which can be given to charitable institutions.

10. Eleemosynary--class of trusts which provide for the relief of want and suffering by providing the necessities of life and preventing or curing sickness.

11. Trusts to promote health need not be limited to the poor.

12. A trust to make gifts from motives of generosity and liberality, without regard to the effect of, or need for, the gift, is not charitable.

13. What controls whether a trust is charitable is its purpose.

14. Ct. held an art museum trust a private charitable trust because it advanced education.

J. Hardage v. Hardage (1954) - The testator bequeathed property in trust to be used to defray medical expenses of his needy blood relatives and for educational loans for needy descendants of his blood relatives. The ct. stated that it is true that a trust for a charitable purpose which is not so limited in its beneficiaries is charitable, even if a "preference" is given to a small class of beneficiaries. Here, however, the trust is so limited (i.e., only to blood relatives of the testator) that enforcement of it is a "private family matter," and not for the public benefit. Since this is a private trust, the rule against perpetuities applies.

1. Where a trust is limited such a small class of beneficiaries that enforcement of it does not benefit the public, it is not a charitable trust, even though its purpose is to provide charitable assistance.

2. This is the majority rule that the Rule against perpetuities has a different application to private trusts than it does to charitable ones.

3. The benefitting a restricted group is possibly the wrong analysis.

a. The bottom line is that he was trying to hold wealth in the family forever, bypassing the Rule against perpetuities.

4. In a charitable trust, legal title to the trust property must vest within twenty-one years in the trustee.

a. However, once that title has vested, the Rule against perpetuities does not apply to any trust provisions shifting the trust property from one charity to another charity, regardless of the time between such interest.

5. If trust property can shift from an individual to a charity, or vice-versa, at a time beyond the perpetuity period, the shifting interest is void under the Rule against perpetuities.

6. In the case of trusts for educational purposes the condition of public benefit must be satisfied.

7. Cts. have held that a trust can be charitable even though the settlor gives certain qualified relatives preference in the distribution of the charitable.

8. A great majority of American courts have declined to hold that trusts to confer educational or eleemosynary benefits on the relatives of the settlor are charitable.

9. Some cts.' decisions have stressed the lack of altruistic motive on the part of the donor.

10. A charitable trust will be enforced in the U.S. even though the social benefits from it will accrue to the people of foreign countries.

11. But, some state statutes require charities to confer benefits only within the state to procure inheritance or ad valorem tax exemption.

K. In Re Byrne's Estate (1953) - Petition for instructions on a will. The testatrix bequeathed the residue of her estate in trust for the erection of a tomb for herself in St. Joseph's Cemetery.

1. A gift or trust for the erection of a tomb or monument is not of sufficient public benefit to be considered charitable, unless such structure is part of the "fabric of a church" or commemorates some "notable" person.

2. Ct. stated that a trust for the perpetual care of a cemetery lot is charitable, since the public has an interest in the sightly appearance of cemeteries.

3. Most state statutes permit erection of a suitable monument an purchase of a vault--the personal rep. is given a reas. amt. to do this. No express direction need be given in the trust document.

4. The trust failed because it was not a valid private trust either (no beneficiary capable of claiming the trust benefits), and the trustee must either apply it to the trustee's designated purpose (unless to do so would be impossible, capricious, or violate the rule against perpetuities) or surrender it to the testator's estate.

5. This is the majority rule.

6. Unenforceable trust for the erection of private monuments and for the care of pets are called "honorary trusts" and such trusts actually create a "discretionary special power of appointment" in the trustee, which is void if it can be exercised beyond the perpetuity period.

a. The trustee is on his honor (i.e., has no legal obligation) to carry out the trust, if it does not violate the Rule against Perpetuities.

L. In Re Cavill's Estate (1974) - Appeal from the approval of a will. Cavill's will, executed 24 days before her death, left the residue of her property to five charities in violation of the State's Mortmain statutes.

1. Mortmain Statutes invalidating all gifts to charities within 30 days of death are invalid under the Equal Protection Clause. No fair and substantial relation to the legislative object.

2. This particular statute was over-inclusive in that it doesn't exclude people who die in an accident (a person not worried about dying). It was also under-inclusive because a person who is worried about death, if makes bequest was before the 30 days of death.

3. The purpose behind the Mortmain statutes is to protect close relatives from overreaching influence by religion and to require that a testator clearly consider the objects of his bounty, not merely reacting out of a fear of impending death.

4. More narrowly drawn Mortmain statutes remain in force in various jurisdictions and more broadly worded ones are still in force in others.

M. Register of Wills for Baltimore v. Cook (1966) - Appeal from a state tax assessment of a testamentary trust. Cook left funds in trust to aid in the passage of the ERA.

1. A trust is charitable in nature if it seeks to eliminate discrimination or to change government through peaceful methods.

a. This is the majority view.

2. The term "charity" has a wider meaning in our tax laws than that commonly associated with it.

3. The ct. stated that bequests are not based on their wisdom or whether the courts or even the general populace believe the intended action to be wise or prudent.

4. Federal income and estate tax laws deny a charitable deduction if a substantial part of the activities involves the carrying on of propaganda or otherwise attempting to influence legislation. However, casual political activity was not deemed substantial and a trust to aid a local Good Government League was deemed entitled to a deduction.

5. This particular trust also provided relief for women victims of discrimination.

6. Gifts in aid of political parties have been held non-charitable.

7. Hansen said that to be charitable, it has to be for the public good.

N. Beatty v. London Spiritualistic Alliance, Ltd. (In Re Hummeltenberg) (1923) - Summons to determine whether a bequest was charitable. The testator bequeathed a fund in trust, the income from which was to be used for the training of suitable persons as mediums.

1. For a trust to be considered charitable, it must be shown both that the gift in trust may or will operate for the public benefit, and that the trust is one which the court, if necessary, could undertake and administer.

2. The court stated, the duty of the court is to determine if it operates for the public benefit. And there is no worthy evidence supporting the alleged powers of diagnosis and healing attributed to mediums.

3. The court stated that the trust document didn't state that the trust gives a "preference" to diagnostic and healing mediums.

4. Even though not illegal, it was not found charitable.

5. Possibly should have been upheld as an honorary trust--maybe prejudice was involved.

6. Most cts. are unwilling to find a charitable trust when the trust is intended to disseminate ideas or creations of the settlor himself.

7. However, courts are usually more reluctant to interfere with religious beliefs--declare trusts for a religious purpose not charitable.

a. Religious trusts are given wide latitude.

b. There are limits, particularly when the trust is intended to disseminate the ideas or creations of the settlor himself.

c. One ct. held that writings to be circulated must not be, when considered with respect to their purpose and general tendency, hostile to religion, to law, or to morals.

d. Trusts for new untested ideas or creations have not been upheld. No basis for healing power is found.

8. Although a settlor usually becomes the beneficiary of a "resulting trust" when the trust fails (as here), sometimes he does not:

a. when the trust instrument states what to do with the trust property when the trust fails, or

b. when the settlor receives consideration for his original transfer in trust, or

c. when the trust was created for an illegal purpose.

O. Thornton v. Howe (1862) - Bill to declare a trust void. The testatrix bequeathed property in trust for the propagation of the writings of the late Joanna Southcote, a Christian who believed she to give birth to a second Messiah.

1. A trust for the purpose of extending the knowledge of the Christian religion, or for the purpose of printing and circulating works of any religious tendency, unless it is immoral, is charitable.

2. The court makes no distinction between one religion and another. Even a trust for the purpose of advancing writings of a religion which is foolish or devoid of foundation is not void, unless it encourages immorality.

3. There is a general tendency of the courts to uphold as charitable any trust for religious purposes.

4. Under the Restatement, trusts to promote education by the dissemination of irrational doctrines are not charitable, but trusts to promote a religious doctrine are charitable unless they are criminal or against public policy.

5. Most states do not have Mortmain Acts restricting charitable trusts.

6. Support of religion trusts may take the form of the advancement of religion in general; or such religion as the trustee may select; or providing for a course of sermons; or for missionary work; or for the distribution of Bibles.

a. Earlier cases exhibited a tendency to be hostile to trusts to propagate infidelism and atheism.

b. More recent cases indicate a contrary tendency.

7. In the U.S., the establishment clause and the free exercise clause of the Constitution encourage courts to construe religious trusts with great tolerance.

a. U.S. Supreme Court has held that the 1st Amendment prohibits civil courts from resolving church property disputes on the basis of religious dogma and practice.

8. Rest. of Trusts 2nd declares that trusts to promote education by the dissemination of beliefs or doctrines which are irrational are not valid charitable trusts whereas the standard of invalidity to which a trust to promote a religious organization or doctrine must conform is whether it is criminal or against public policy.

9. A ct. held in a case to promote the Christian Science religion that the theories taught in the books to be promoted would lead to sickness and death corresponding to the extent that they were followed by medical students, and would do great harm to the public good. The appellate ct. upheld the lower court because the books were against public policy.

10. Courts are more reluctant to interfere with religious beliefs.

a. Articles which reek of the sewer, or are blasphemous against all religion will not be allowed.

P. The problem of Partial Invalidity

1. Where a trust is not divisible and a portion of the trust is invalid, there can be problems where the proposed noncharitable disposition is not minor and temporary or merely optional with the trustee.

2. When the invalid condition relates to a separable and incidental term in the trust instrument rather than to one of its designated purposes, a court may save the entire trust by using its powers of cy pres or deviation to excise the offending term.

3. Cts. have separated terms of a private trust nature and enforced the rest of the charitable trust.

Q. St. Joseph's Hospital v. Bennett (1939) - Action to invade trust corpus. Doheny left a gift to various hospitals, including St. Joseph's, to be held as an endowment, the income from which could be used for ordinary expenses.

1. Qualifications placed on testamentary gifts or trusts to charities will be enforced by the attorney general.

2. The court held that it was not a charitable trust, but a gift with restrictions. Yet, the hospital is obligated by law to observe restrictions the same as if it were in a trust. It must act like a trustee.

3. There are advantages if it is not in trust. It is a lot more flexible. The "trustee" can commingle funds and there is no court supervision.

4. Charitable institutions receive preferential treatment as to gifts or trusts donated to them. The Rule against perpetuities does not apply to such gifts and courts will, in every way possible, attempt to validate bequests.

a. In return, any conditions imposed on such gifts and/or trusts such as restrictions on permissible use etc., will be given effect absent extraordinary circumstances.

5. A gift in trust to a trustee, the income from which is to be distributed to various charities has been deemed a valid charitable trust.

6. Depending on state law, private charitable foundations may be established to fund activities advancing various charitable purposes.

7. In many cases the ct. has found an intent to make an absolute gift, not a gift in trust, so that the corp. owns the charity fund just as it does other assets, subject to the provisions of its statutory charter.

8. If a gift is absolute to a charitable corporation and the corp. misuses the gift, the attorney general may, by quo warranto, revoke the charter.

9. Language of obligation - Language which obligated the beneficiary to do what the settlor requested.

10. Language of motive - Language which does not obligate the beneficiary but merely expresses the settlor's desires.

11. Community trust--gifts are held by a trustee and the income applied to various charitable objects in the community.

a. Some state statutes expressly validate bequests to these community trusts even if the purposes of the trust are not stated in the will.

12. Trustees may be exposed to greater personal liability, both in the day-to-day administration of the business and in their accountability for negligence, than the officers or directors of a corporation.

13. Corporations probably have more freedom of action and are less subject to state regulation than are trusts.

14. Both types of trusts can be altered by the court using its cy pres power. Both are subject to restrictions such as the mortmain acts. Trust principals frequently apply to charitable corporations.

R. Enforcement of Charitable Trusts

1. It is rare for a co-trustee to enforce a charitable trust.

2. When there is property to be distributed through another trust, then a cotrustee may enforce.

a. Such as a trust for the benefit of a parish.

3. A settlor or his successors generally have the information and the incentive to challenge the validity of a charitable trust if there is cause to believe that the written terms of the trust deed or will contain some defect.

a. A settlor or his successors in interest may have the act of trust creation set aside for such invalidating causes as fraud, undue influence, or failure of consideration.

b. A gift to charity, absolutely or in trust, may be on condition subsequent.

c. Or the settlor may reserve a determinable estate, which would cause the trust property to revert automatically.

d. When it becomes impossible to carry out the specific purposes of a charitable trust created without any general charitable intent, some courts have held that the trust property will revert even in the absence of an express provision for reverter.

4. Neither the settlor nor his successors have any standing to enforce a valid charitable trust or to demand the return of the property if there has been a breach of trust.

a. At common law the founder of a charity in corporate form was entitled to "visit" or inspect the charity and issue orders for the correction of abuses. This right passed to his heirs and it could be vested by the settlor in a board of visitors.

5. There are three circumstances when the terms of a charitable trust can provide a private party with authority to enforce its provisions

a. One cotrustee can enforce the trust against another cotrustee who is in default.

b. If the terms of a charitable trust require the distribution of benefits to other charitable trusts or corporations, such as a charitable trust to distribute benefits to various educational institutions or hospitals, the distributee "sub-trusts" have a legal right to enforce the trust.

c. When some person has a special interest in the enforcement of the charitable trust, such as a member of the worshipping congregation for which it was established, that member has sometimes been allowed to enforce the trust.

6. Aside from the foregoing exceptions, it is the nearly uniform rule that a charitable trust can only be enforce by the attorney general.

a. Vacancies in the trusteeship of a charitable trust will be filled by the court, which can reject the attorney general's nominee.

b. Hansen said the attorney general's have the place, but historically have a bad track record of enforcing trusts.

c. The purpose of vesting in some public official like the atty. gen. the exclusive power to begin proceedings to enforce charitable trusts:

(1) the beneficiaries of such trusts are usually some or all of the members of a large shifting class of the public--if any member of this class who deemed himself qualified might begin suit, the trustee would frequently be subjected to unreasonable and vexatious litigation.

d. Persons claiming to represent the classes of citizens, taxpayers, or other individuals to be benefitted by a charitable trust have therefore generally been unsuccessful in attempting to sue to enforce the trust.

e. While public supervision of the administration of charities remains inadequate, a liberal rule as to the standing of a plaintiff to complain about the administration of a charitable trust or charitable corporation seems decidedly in the public interest.

XI. Resulting Trusts

A. Arises by operation of law in 3 situations:

1. If trust property is excessive to accomplish trust purpose.

a. Where an express trust is created gratuitously and there is excess, then have to decide what to do with the leftover property.

b. By law a resulting trust arises in favor of the settlor or his successors.

c. When there is no alternative disposition in the trust instrument, the only other rational possibility is to return the excess property to the settlor (or to his successors if he is dead) in a resulting trust.

2. Failure of a trust or if the trust objects are accomplished--

a. Whenever a settlor, acting gratuitously, attempts to create an express private trust but fails to dispose of the entire beneficial interest in the trust property, or whenever a trust is void for any reason other than an illegal objective, the court will find a resulting trust for the settlor (or his successors), unless the settlor has made an alternative disposition of the beneficial interest.

b. Thus, if a settlor of a private trust transfers property as a gift, but fails to make a complete disposition, or fails to name the beneficiaries or describes them insufficiently, or if the trust is or becomes impossible of being carried out, the usual consequence is a resulting trust.

c. If the trustee gave consideration for the creation of the trust, there is no resulting trust as to excess property. The trustee retains the excess as his own.

d. The settlor may prevent a resulting trust by a provision in the trust instrument that in case of failure of the trust the beneficial interest shall vest in the trustee or some other person.

e. If the settlor is living when a resulting trust comes into existence he is the bene.

f. Most cts. have held that a trust will result for the benefit of the heirs as to realty or the next of kin as to personalty if the settlor died intestate, and for the residuary legatees or devisees if the settlor left a will with a valid residuary clause.

(1) A majority of jurisdictions hold that the heirs are to be determined as of the death of the settlor or testator, not as of the termination of the trust.

3. Purchase Money Resulting Trust--settlor has provided money which has resulted in the purchase of property which is put in the name of a third person.

a. 1 person pays money to acquire property, but tile resides in another person.

b. There is a presumption because of transactional facts, the C holds the property for the benefit of the grantor (A).

c. C can show with evidence that A's intent was otherwise.

d. A conveyance without consideration is now deemed to be a gift.

B. A resulting trust is based on the assumption of what the parties intended to do. No actual intent can be expressed.

C. The most important occurrence is the failure of an express trust.

D. The statute of frauds does not apply to resulting trusts.

E. When a settlor, by conduct or words, manifests an affirmative intent to create a trust, he creates an express trust, which will be enforced by a court of equity.

1. In creating an express trust, the settlor demonstrates his positive intention to separate the legal title from the beneficial interest.

2. Like an express trust, the resulting trust depends upon the settlor's manifestation of intention. However, the two types of trusts differ in the role intention plays in their creation.

a. In a resulting trust, instead of a positive intention to create a trust, the settlor demonstrates an absence of an intention to pass beneficial interest as he passes title.

F. Mims v. Mims (1982) - Review of order dismissing action to establish title to real estate. Mr. Mims contended that a house held in the names of both him and his divorcing wife should be his alone, as he pd. the whole purchase price with separate funds.

1. A house held in the names of a couple may, upon divorce, be judicially conveyed to one party alone, if that party pd. the full purchase price from separate funds.

2. When equity so demands, a ct. can step in and give title to the supplier of the purchase-money.

3. The ct. in dicta stated that now with the changed economic status of women, the presumption of a gift when one spouse had supplied the whole purchase money, would apply to both sexes equally.

4. The common law presumptions were that if the husband gives property, it was a gift and the wife retained the interest. It involved the traditional role of the husband and wife and the idea that the husband was the breadwinner and the wife lacked business knowledge.

a. The presumption of a gift is also used when the payor is the father and the grantee a child, and usually when the payor is the mother of the grantee.

b. In the case of a purchase of a matrimonial home, a presumption of an intent to give a half interest to the other spouse exists when the husband or wife pays for property and has title placed in the names of both as joint tenants.

c. The determining factor of whether the gift presumption will apply is whether the transferee is a natural object of the bounty of the payor.

d. Regarding people who cohabit without marriage, courts may use constructive trusts, resulting trusts, or equitable liens to enforce a duty of fair dealing in the relationship.

5. If there is an agreement, you don't have a resulting trust.

6. If P had intended no gift, then the general rule would apply (that outside of marriage) and a resulting trust would arise because of the presumption that the grantee holds the property in a resulting trust.

a. The grantee has the burden to show that there was a different intention.

b. Rebuttal may be made by evidence of an oral agreement that the grantee was to be a trustee, or by admissions by the grantee, or by proof that the payor occupied the land and paid taxes and other carrying charges.

c. Another rebutting factor may be that the property conveyed represented the entire estate of the husband.

d. After absolute title has vested in a grantee, another cannot obtain a resulting trust for himself by paying for repair, taxes, or improvements on the property or by paying off a mortgage on the property.

(1) However, the ct. may impose an equitable lien in favor of a payor who intended no gift.

G. Fox v. Shanley (1920) - Action to establish resulting trust. Fox and his late wife purchased real property by putting up $3K with her taking title and giving a not for $2,500. P argues that he should get his proportionate share 39/55ths. Aliquot shares are normal fractions. Ct. said that aliquot shares are immaterial.

1. A purchase money resulting trust arises from the presumed intention of the parties to an agreement and, as such, as long as a definite amount of the whole purchase money for a piece of property can be established as having been paid by a particular party, a resulting trust will be imposed on the property--pro tanto--for that party.

2. The gen. rule is that payment made after receipt of deed are not relevant in determining intent at time deed was made.

a. Unless there is a real understanding between the spouses that this agreement is a K of who is going to pay what part of the mortgage.

b. This is an exception to real intention.

c. The agreement has to exist at the time the mortgage is created.

3. This case illustrates the majority rule.

4. The rationale is that nay person who pd. a definite portion of the purchase price of a piece of property must have intended to take a proportionate interest therein.

a. Remember, this is a mere presumption--rebuttable by even oral evidence of some other intent.

b. The burden is on the payor to show (by clear and convincing evidence) that he did pay a definite part of the purchase price.

5. When the claimant pays the entire purchase price of the property, an express agreement is not a prerequisite to inferring a resulting trust.

a. When the claimant pays only a portion of the price, the parties are more likely to have an express agreement regarding the purpose for which the property is held.

6. Although an express agreement may not be necessary, the payor must at least be able to allege and prove what amt. or what proportion he has paid toward the total purchase price.

7. The great maj. of cases enforce a resulting trust for the payor of a definite part of the price, without regard to the size of the transaction.

8. It is elementary that a purchase money resulting trust could not arise from the mere payment for repairs, taxes, improvements--or even by paying off the mortgage.

a. All that appears to be necessary is a real understanding between the parties of a liability to pay which dates back to the time when the legal title passed, and which is part and parcel of the original transaction.

9. This case is the majority rule.

10. This rule applies to personalty as well as realty. The rule's chief advantage to the purchaser of personal property in the name of another is the application of the burden of proof.

a. To the purchaser of real property, the rule provides two advantages. He first has the burden of proof advantage. The second is that it removes the transaction from the Statute of Frauds written memorandum req.

H. Armstrong v. Blalack (1935) - Action to obtain a resulting trust. Blalack lent his wife $500 toward the purchase of certain real property.

1. A purchase money resulting trust will not arise in favor of a supplier of purchase money for a transfer of real property to another, where such purchase money is advanced merely as a loan--with expectation of reimbursement.

2. It is diff. here, because it's a loan--he's an unsecured creditor.

3. A resulting trust arises where husband has an interest in the property, here the husband expected the money to come back.

a. Unless, they specifically agree that this is a loan and he expects an interest in the property, he's out of luck.

b. Where there is an agreement a constructive trust will apply.

(1) The Statute of Frauds doesn't apply to constructive trusts either.

4. There is a presumption that husband gave a gift and this can be rebutted with evidence.

a. Don't claim that it was a loan--a mere loan does not create a resulting trust in the property.

b. A resulting trust will arise in favor of the trust claimant when the grantee has pd. the consideration as a loan to the claimant or to discharge a debt to the claimant.

(1) Likewise, if A pd. the consideration for a conveyance to B there would be a resulting trust for C if A's payment was made as a loan to C or in discharge of a debt to C.

(2) If a lender stipulates that he is to take title to the land bought with the money he lends and the title he gets is to stand as security, he will be in the position of a mortgagee and a resulting trustee also.

I. Larisey v. Larisey (1913) - Action to recover land. W.N. Larisey, Sr. purchased land--title to which he had placed in his nephew W.N. Larisey, Jr. (P).

1. A resulting trust arises in favor of one who pays the purchase money for property but has title placed in the name of another only because of the rebuttable presumption that he who pays for a thing intends a beneficial interest therein for himself, and this presumption is effectively rebutted by evidence of a diff. intent.

2. The presumption is effectively rebutted by evidence of a diff. intent.

a. Even parol evidence may be used to prove such diff. intent.

b. This intent supplants the presumed intent of the resulting trust doctrine--rendering it inapplicable.

3. W asserted that the intent was that his uncle would have life interest.

4. The presumption of intent to create a trust is rebutted by proof of any other intent--not necessarily an inconsistent one.

5. There are other circumstances, in which the presumption simply never arises in the first place

a. Supplier of purchase money is a close relative of the grantee, a presumption of gift arises.

b. The only way a trust may be established is by clear and convincing proof of an express trust agreement between the parties.

c. Where the supplier of purchase money has title placed in the name of another for an illegal purpose, no resulting trust can be presumed.

6. When the payor and grantee expressly agree on an interest that is less than the law would have given in a resulting trust without the agreement, some courts use the express agreement to rebut the presumption of a resulting trust in the whole amount.

7. The common law purchase money resulting trust in realty has been abolished by statute is a few states.

a. However, courts in these states give substantially the same relief in many cases when a resulting trust would have been appropriate by declaring that the grantee holds on constructive trust for the payor.

b. Other states have legislation abolishing the purchase money resulting trust except when the land is purchased with the monies of another in violation of a trust or when there is an express agreement that the payor is to have an interest in the purchased land.

XII. Constructive Trusts

A. Unlike an express trust or a resulting trust a constructive trust is not a legal relationship based on the intent of the parties. It is a fraud-rectifying and NOT an intent-enforcing trust.

B. A constructive trust is not a title to or lien upon property but a mere remedy to which equity resorts in granting relief against fraud.

C. But the impact of the constructive trust is not limited to circumstances comprised within the term fraud.

1. A constructive trust is the formula through which the conscience of equity finds expression. When property has been acquired in such circumstances that the holder of the legal title may not in good conscience retain the beneficial interest, equity converts him into a trustee.

2. A ct. of equity in decreeing a constructive trust is bound by no unyielding formula. The equity of the transaction must shape the measure of relief.

3. 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.

D. Cts. treat the trustee when he becomes such as if he had been a trustee from the time of this wrong.

1. That the wronged party can sometimes make a choice between a constructive trust and an alternative remedy in law or equity seems to support the view that until the wronged party asks for a constructive trust he does not have one.

E. To obtain a constructive trust the complainant need not usually prove inadequacy of remedy at law.

1. He must, however, identify particular property as the res of the trust. The mere proof that a defendant has been guilty of wrongdoing against the plaintiff and that he has assets that could be used to satisfy the P's claims is not a sufficient basis for equity to impress a constructive trust.

2. To obtain a decree establishing a constructive trust and thereby secure a conveyance of the property, the complainant must be willing to do equity to the def.

F. The sole obligation of the trustee is to convey to the beneficiary.

G. The ct. may impose a constructive trust even though the complainant did not specifically plead it.

H. Examples of wrongful conduct which may give rise to a constructive trust include:

1. A thief used stolen money to purchase an automobile. In the absence of proof that the purchaser was a bona-fide one, the purchaser held title under a constructive trust for the original owner.

2. A husband murdered his wife. He held his 1/2 share of the wife's property in constructive trust.

3. In a divorce proceeding, a ct. impressed a constructive trust on the insurance proceeds for the benefit of the wife.

4. In addit. to foregoing examples, a constructive trust may be a remedy for breach of duty.

5. Also, they may be used to relieve the bene. of an oral trust barred byu the Stat. of Frauds.

I. The same principles applied to fraud, misrepresentation or concealment in imposing a constructive trust on the property, are also implied when property is obtained by undue influence, duress, or mistake.

J. If a wrongdoer can use these statutes (Statute of Frauds, Statute of Wills) to cover his wrongdoing they may be serving to facilitate the very thing they were designed to prevent.

K. In wills cases which are testamentary dispositions, the Statute of Wills may possibly be a bar to enforcement.

L. In deed cases, the Statute of Frauds may be a possible bar to enforcement.

M. Let's compare the cases from this chapter. Notice the type of trusts, the transfer, the beneficiaries and the result. See Number 1 of each under the letter of each case.

1. Ruland--Secret trust--testamentary transfer outright (oral promise)--beneficiaries known--RESULT--constructive trust for intended beneficiaries.

2. Olliffe--Semi-secret trust--testamentary transfer in trust--beneficiaries known--RESULT--resulting trust for heirs of grantor (not to intended).

3. Boyes--testamentary transfer=outright oral promise--beneficiary unknown (secret), bene. found two letters after his death--RESULT--resulting trust for the heirs of the grantor.

4. Horsley--deed transfer=outright oral promise--oral promise to convey to a known beneficiary--RESULT--no remedy.

5. Lipp--can infer fraud intent from surrounding circumstances--deed transfer=outright oral promise--oral promise that grantor will have a life estate--RESULT--constructive trust for bene. grantor.

6. Sinclair--Confidential relationship is enough--deed transfer=outright oral promise?--bene. is known--RESULT--constructive trust for bene.

7. Orella--NOT majority but gaining ground--deed transfer=outright oral promise (applies to all kinds of transfers)--bene. gave an oral promise to reconvey at request--specific restitution because of unjust enrichment (goes back to grantor not to beneficiary).

N. Church v. Ruland (1870) - Action of ejectment. Father devised property to daughter on her oral promise that, after her death, one-half of the property would go to the children of Stevens. D's will conveyed property to Church.

1. Ruland--Secret trust--testamentary transfer outright (oral promise)--beneficiaries known--RESULT--constructive trust for intended beneficiaries.

2. Where a person orally promises a testator to hold property for another, thereby inducing the testator to devise the property to the promisor, a constructive trust arises in favor of the intended beneficiary.

a. If the promise is after the conveyance, then no constructive trust will arise.

b. There must be an inducement.

c. The rule is founded on the principle that the legacy would not have been given, or intestacy allowed to ensue, unless the promise had been made; and hence the person promising is bound in equity to keep it, as to violate it would be fraud.

d. Courts also give relief to the intended beneficiary when the donee by intestacy or will uses duress, deception or undue influence to prevent the execution, republication, or revocation of a will.

3. What is important is not the promise, but the testator's reliance on the promise.

4. A constructive trust is created because otherwise the Statute of Frauds would be used to perpetuate frauds.

5. There is no parol evidence problem because the will is still given effect.

a. A constructive trust is created.

b. The constructive trustee's only duty is to convey.

6. With a secret trust, once you have to bring oral evidence to find out about trust you may as well find out the beneficiaries as well. But this is not how the courts think.

O. Olliffe v. Wells (1891) - Action to have legacy of estate residue declared lapsed, and to have property distributed among heirs at law and next of kin. Testator devised residue of estate to the executor with an instruction to distribute it, according to his discretion, so as to carry out the testator's pre-expressed wishes.

1. Olliffe--Semi-secret trust--testamentary transfer in trust--beneficiaries known--RESULT--resulting trust for heirs of grantor (not to intended).

2. A semi-secret trust is where the trust is known to exist because it is mentioned in the will, but the beneficiaries are secret--known only to the trustee.

a. The trust existence is evident on the face of the will so no oral evidence is needed to find out about it. Since no oral evidence is needed for that purpose, the court doesn't bring any other oral evidence in to find out about the intended beneficiaries.

3. Where a will upon its face shows that the devisee takes the legal title only and not the beneficial interest, and the trust is not suff. defined by the will to take effect, the equitable interest goes by way of resulting trust, to the heirs or next of kin, as property of the deceased not disposed of by his will.

a. When the will states that the property is to be held in trust and the devisee has agreed to the trust, the devisee can be compelled to hold the property upon a constructive trust.

b. The reasons for compelling him to hold it upon a constructive trust for the intended purposes are as strong as where the devise or bequest is absolute on its terms.

c. As with a bequest absolute on its face, it's immaterial whether the agreement of the devisee or legatee was made prior to or at the time of or after the execution of the will.

4. The purported trust in favor of the charities did not appear on the face of the will, therefore, it cannot be established by extrinsic evidence.

5. Since the trust cannot be carried out, the bequest falls within the residue of the estate, and goes to the heirs and next of kin plaintiffs.

6. Where a testamentary trust fails for any reason, the assets that were to be part of that trust must still be distributed. If no contingent provision was prepared, the assets must pass intestate.

7. A statement by a testator, in his will, that certain individuals are not to share in his estate does not constitute a testamentary scheme.

8. When the court refuses a constructive trust remedy the trust results to the successors of the settlor by testacy or intestacy, if the has not made provision for the disposition of the trust capital on failure of the intended trust, even though the testator actually expressed an intent that his successors should not take.

P. In re Boyes (1884) - Action by next of kin for declaration that they are beneficially entitled to testator's personal estate. Testator left all of his property to a trustee, but failed to disclose, during his lifetime, the beneficiary under the trust.

1. Boyes--testamentary transfer=outright oral promise--beneficiary unknown (secret), bene. found two letters after his death--RESULT--resulting trust for the heirs of the grantor.

2. A testator cannot, by imposing a trust upon his devisee or legatee, the objects of which he does not communicate to him, evade the Statute of Wills by declaring those objects in an unattested paper found after his death.

a. The trust was never perfected during the lifetime of the grantor.

b. The trustee's conscience is being bothered.

c. BLACK LETTER RULE--in order for a constructive trust to arise, the conscience of devisee must be affected in equity in favor of a definite 3rd person during the lifetime of the testator.

3. Instances are distinguished where the testator has been induced to make a will, or not to revoke one already made, by a promise of the devisee to deal with the property in trust on the conscience of the devisee.

a. Here, the beneficiary cannot accept an indefinite trust.

4. A constructive trust would not arise in favor of any residuary devisees or next of kin unless the devisee failed to carry out the testator's intentions.

Q. Horsley v. Hrenchir (1937) - Action for partition. Mother, obtaining property from one daughter on an oral understanding to hold it in trust, conveyed the property to another daughter.

1. Horsley--deed transfer=outright oral promise--oral promise to convey to a known beneficiary--RESULT--no remedy.

2. An inter vivos transfer of an interest in land upon an oral, and unenforceable, promise on the part of the transferee to hold it in trust for the transferor will give rise to a constructive trust only if the transfer was procured by fraud, misrepresentation, duress, undue influence or mistake, a confidential relationship existed, or the transfer was made as security for an indebtedness of the transferor.

3. Although fraud is alleged in the transfer from the mother to Hrenchir, the mother herself did not fraudulently induce the original transfer. The case falls within the Statute of Frauds; the mother's promise is unenforceable.

4. This is the rule of the restatement. Many cts. in order to find a constructive trust, liberally construe these exceptions. The modern trend is away from the Restatement's limits to recognizing unjust enrichment resulting from any unconscionable conduct.

5. The Statute of Frauds states that it has to be in writing.

a. To get around this requirement and get a constructive trust (3 rules):

(1) Oral promise was fraudulent at time it was made.

(2) If a confidential relationship between the grantor and grantee.

(a) Here, did not plead a confid. relat.

(3) If it is security for a debt.

6. A constructive trust is implied by operation of law as a remedial device against one who by actual or constructive fraud, abuse of confidence, mistake, commission of a wrong, or by any form of unconscionable conduct, has either obtained or holds property which in equity he ought not to enjoy.

R. Lipp v. Lipp (1930) - Action to have sale of leasehold estate enjoined, and to declare a constructive trust. Mother, who was ill, conveyed property to son on the understanding that he would support her.

1. Lipp--can infer fraud intent from surrounding circumstances--deed transfer=outright oral promise--oral promise that grantor will have a life estate--RESULT--constructive trust for bene. grantor.

2. In order for a constructive trust to arise against a transferee of property who has failed to honor an oral agreement with the transferor, it must be proved that the transferee induced the conveyance with actual intentional fraud.

3. A mere broken promise is insuff. to create a constructive trust, have to show that the promise was fraudulently made.

a. A mere refusal to perform a promise would result in every breach of K instantly creating a constructive trust and the Statute of Frauds would be nullified.

4. In this case, it was inferable from the facts and circumstances that the son entered into agreement by which he induced his mother to convey her property to him.

a. These are used to infer his state of mind at the time of the promise.

S. Sinclair v. Purdy (1923) - Action to declare legal owner of property as constructive trustee. Purdy transferred his property to his sister on her promise that she would hold it for him.

1. Sinclair--Confidential relationship is enough--deed transfer=outright oral promise?--bene. is known--RESULT--constructive trust for bene.

2. Without a promise (or when unsure), can show a confid. relationship by showing that wouldn't have transferred w/o a confidential relationship.

3. Where a person transfers property to another who occupies only a confidential relationship to him (e.g., a relative or friend), but relies on the latter's agreement that the property would merely be held until such time as the transferor demands its return, a constructive trust will arise in favor of the transferor or his successors and assigns.

4. The absence of a formal writing grew out of that very confidence.

5. FACTORS: A confidential relationship will be found to arise where one party has entrusted another with management of his business affairs for an extended period, where, because of experience, health, age, or lack of education, a disparity of position exists, or invariably in cases involving close family ties (e.g., spouses, siblings, parent and child).

a. Hansen said that it has to be more than a mere blood relationship. There must be reliance or trust or some other element involved such as fraud, duress, mistake or undue influence..

b. Need to show that wouldn't have transferred if didn't have the confidential relationship.

c. The confidential relationship should exist prior to and indep. of the transaction in question.

d. Cts. also apply the confidential relationship label to declare a constructive trust when the recipient of a trade secret or formula or other intellectual property breaks the agreement of confidentiality and benefits from the secret.

T. Orella v. Johnson (1952) - Action to impress a trust on property. Orella conveyed property to his stepdaughter on her oral promise to reconvey it at his request.

1. Orella--NOT majority but gaining ground--deed transfer=outright oral promise (applies to all kinds of transfers)--bene. gave an oral promise to reconvey at request--specific restitution because of unjust enrichment (goes back to grantor not to beneficiary).

2. Where one person has obtained real property on the oral promise to hold it in trust for another, but subsequently refuses to do so, and retains the property, he may be compelled to make specific restitution to the transferor even in the absence of a confidential relationship between them, or a showing of fraud.

3. The remedy of specific restitution, based of a theory of unjust enrichment, is distinct from the remedy of a constructive trust based on the abuse of a confid. relat. By utilizing this remedy, the wronged party need not show fraud.

4. This is the minority view, but growing.

5. When the oral agreement is to hold in trust for a third party, C, the formal rules in most jurisdictions are approximately the same as when the grantee, B, has agreed to hold for the grantor, A.

a. If the circumstances fit within three exceptions--fraud, confid. relations, or contemplation of death--then B holds the interest upon a constructive trust for C.

b. When none of the three exceptions applies a majority holds that B can keep the property.

XIII. Illegal Trusts

A. A trust can be invalid because its terms are illegal or because its objectives, probably effects, or the manner of its creation are forbidden by statute or by public policy.

1. A trust can be invalid because it doesn't comply with the Rule against perpetuities.

2. Trusts to discourage marriage or trusts to promote criminality or other illegal or unsocial conduct are also invalid.

3. A trust conveyance made by an insolvent grantor or one who is thereby rendered insolvent, or one made with actual intent to hinder, delay or defraud creditors, is a fraudulent conveyance, subject to invalidation under state or federal law.

4. A trust established to deprive a spouse of a statutory share in the property of the settlor spouse may be valid since the surviving spouse's rights do not arise until the death of the settlor.

5. If a trust conveyance is fraudulent, an injured creditor can set it aside at least to the extent necessary to satisfy her claim.

6. When the parties are just the settlor and the recalcitrant trustee there are two alternatives:

a. The ct. may declare a resulting trust for the settlor or her successors, or simply permit the trustee to retain the property free from the terms of the trust.

b. The choice between these alternatives depends on whether the ct. places higher value on deterring future immoral or unethical conduct or upon correcting present wrongdoing by the instant trustee.

c. If there is no moral culpability by the settlor, such as when the illegality resulted from mere ignorance or mistake, there is no obstacle to decreeing a resulting trust for the settlor or her successors.

B. In re Robbins' Estate (1962) - Proceeding to determine heirship. Testator directed that his estate be placed in trust to be used for the support of minor Negro children whose parents had been imprisoned on conviction of a "political" crime. The trust was attacked as failing to meet the requirements of a valid charitable trust in that the testator's purpose was to encourage the commission of political crimes. Ct. held that the purpose of the testator was to benefit the children of those convicted of even laws of which he disapproved. The risk that assistance to minor children may encourage some parents to commit crimes is remote and outweighed by society's interest in the welfare of innocent children.

1. In determining whether a trust is violative of public policy, and thereby invalid, a ct. will focus on the purpose for which the property is to be used, and not the motives of the settlor.

2. The dissent stated that the purpose of the trust is to reward criminals by furnishing aid to their children. A trust which tends to induce a breach of the criminal law is invalid.

3. Editor's dissent: A trust violates public policy if its purpose is to induce others not only to commit criminal, but tortious acts as well, to promote immorality, or to induce the demise of parental, familial, or civic ties.

4. Hansen said that this trust doesn't really encourage crime because these are unconstitutional crimes.

5. The test is whether the effect of the trust is to encourage the commission of a crime. If it is then the trust is illegal.

a. Look to the effect of the trust.

6. The ct. may sever the illegal portion of a trust and enforce the rest of it.

7. Trusts to restrain remarriage of a widow or marriage to a named individual are held to be valid since they do not prohibit marriage generally.

8. Any trust provision intending to disturb or destroy an existing marriage is void as contrary to public policy.

9. Trust provisions encouraging the adoption or abandonment of a particular religion are of uncertain validity. More recent trend has been to sustain these trusts.

10. Cts. have held that the direction on the trustees' religion was unenforceable, having no relationship to the administration of the trust.

C. MacRae v. MacRae (1930) - Action to establish title in equity against certain purchasers and for a reconveyance of real estate. Erroneously believing that he would be personally liable for the debts of a business associate, MacRae conveyed land to his wife after she promised to reconvey it upon demand.

1. If a transferor of property mistakenly believes that a judgment will be recovered against him in a pending suit, and comes into equity attempting to establish a secret trust, the conveyance will not be set aside since it is his intent to commit a fraud, and not the accomplishment of the fraud, which governs the court's decision.

2. A transferor who creates a secret trust with an intent to commit a fraud will be deemed to have "unclean hands" and thus precluded from seeking the aid of equity, even if the fraud was never in fact accomplished.

3. If MacRae had not been the one to seek the reconveyance, but rather his innocent successors in interest had come into the equity ct., many cts. have held that the doctrine of clean hands would not have prevented them from recovering. The same rule applies to innocent beneficiaries.

4. This ct. focused on the second test (intention). The husband's wife conveyed the property to a couple who wanted to know to whom should they reconvey the property. The ct. held that each were equal in fault. If the faults were not equal, the lesser evil gets the property.

a. In a secret trust you get oral evidence admitted if the 1st test is used.

5. Whether a trust results for settlor depends on weighing unjust enrichment against the gravity of the attempted wrong.

6. If the intended wrong has been accomplished, there is a fortiori a case for denying the wrongdoer relief in equity.

D. Montgomery v. Michaels (1973) - Action challenging validity of eight trusts. P challenged the validity of eight Totten trust which, in effect, denied to him his intestate share in his wife's property. The court found as to P the trusts were a fraud and could not be allowed to stand.

1. Totten trusts cannot be used to prevent the surviving spouse from obtaining his statutory share of the deceased spouse's property.

2. Two tests whether a trust is subject to a testamentary share: 1) illusory test, 2) intent test (judged by the substance, not the form).

a. If transfer is subject to an intent to reduce then statutory share can access trust.

b. If transfer is not subject to an intent to reduce statutory share, then cannot access trust.

c. The mere fact that it's revocable doesn't make it illusory (intended only as a mask for the effective retention by the settlor of the property which in form he had conveyed.

(1) What is enough? Control, there was really no trust created until death the ct. said here.

3. A Totten trust is valid as to the whole world except as it serves to reduce the intestate share of the surviving spouse.

4. UPC 2-201 to 2-207--The gross estate subject to the surviving spouse's fraction takes into acct. not only revocable transfers like the Totten trust, but also the other assets the spouse has already received from the decedent, such as life insurance proceeds or inter vivos conveyances, which are credited against the spouse's share.

5. Totten trusts are illusory, unless the state has not adopted the UPC, and uses the intent test and there is no intent to reduce the spouse's statutory share.

6. A party may, during his life, reduce his estate in any permissible manner. However, retention of all of the incidents and benefits of ownership of the property, the transfer to only take place at death, is deemed testamentary in nature insofar as it reduces the statutory share of the surviving party.

a. If there are restrictions on use/enjoyment of the property or it is not designed to pass at date of death, the trust will generally not be invaded to pay a statutory share.

E. Discriminatory Trust Provisions

1. Charitable trust provisions favoring or excluding particular segments of the population frequently conflict with modern legal rules forbidding discrimination on the ground of race, color, national origin, sex or religion. By conventional analysis such discrimination are permissive by private action but forbidden by state action.

2. Concerns about discrimination, voluntarily or otherwise, also affect private trustees. The Sup. Ct. held that a nonprofit private school that prescribed and enforced racially discriminatory admission standards based on religious doctrine did not qualify as a tax-exempt organization under the IRC and that contributions to such schools are not deductible as charitable contributions.

3. The question of when judicial or other public involvement with a private trust will constitute state action is spawning an immense progeny of litigation.

4. Cts. have held that ct. appointment of a private trustee to replace the named public trustee who selected the scholarship recipients thereby eliminated prohibited state action.

a. The state merely acted to allow for private intent.

5. Up to the present time the Sup. Ct. apparently continues to recognize a sphere in which private actors can implement discrimination that is clearly forbidden by state actors.

6. The Sup. Ct. reversed a state sup. ct.'s holding approving the resignation and appointing new private trustees when the property involved the segregation of a park. The Ct. held that the mass recreational activities associated with park were plainly in the pub. domain.

F. In re Certain Scholarship Funds (1990) - Appeal of order reforming charitable trust language. A ct., in reviewing discriminatory charitable trusts administered by public entities, reformed the trusts to remove the discriminatory language.2 testamentary charitable trusts 1) based on gender and 2) a trust based on protestant gender. The trustees are the school bd. School bd. brings action to ask permission to apply doct. of administrative deviation (where cts. can change the administration provisions of a trust to make it workable). Ct. holds that the use of the cts. to change it would in itself be a state action.

1. The bd. wanted to get private trustees to perpetuate the discrimination, therefore held to be impermissible.

2. Doctrine of cy pres--usable only in charitable trusts.

a. If specific charitable provision becomes imposs., impractical or illegal, ct. can modify the trust if it is inkeeping with the grantor's intention.

b. Have to find that grantor had a general charitable purpose to give the funds to any student in this case.

3. Ct. holds that grantor would have been just as happy to modify the trust to read student instead of boy or protestant.

4. This case is the general trend.

5. A ct., in the case of charitable trusts administered by public entities, may reform such trusts to remove discriminatory language.

6. The dissent said that the trusts were private creations. The mere fact that the trustees were public did not make them creatures of the state, and therefore the requisite state action for constitutional scrutiny was missing.

G. Issues regarding trust in International Law pp. 308-310

1. Hansen never discussed this in class.

XIV. Skipped Chapter 14 -- Future Interests Rules involved in the Creation of Trusts

XV. Part II Issues in Trust Administration

A. Skipped Chapter 15 -- Initiating, Identifying and Defending the Trust

XVI. Standard of Care and Investments

A. The trustee is held to the prudent investor standard.

B. An investment fund/mortgage pool--a pool of stocks invested by pension trustees etc. and buy into giant pools of investments.

1. It could be asserted that this commingling, but this is allowed.

C. Mutual fund--investment decisions not made by trustee.

1. Managed by a 3rd party who makes decisions of when to buy and sell.

2. Now common and acceptable.

3. Diversification is much greater--so it is stable.

D. Non-Economic considerations in trust investment

1. Factors that a trustee should take into acct. in making its investments include:

a. not investing in S. Africa.

b. concerns for morality, ethics and public welfare (i.e., pollution, consumer protection, fair employment and discrimination)

2. A trustee's primary duty is to preserve the trust principal while maintaining a steady income, always demonstrating loyalty to the interests of the trust beneficiaries.

3. It is unclear when the proposed investments may detract from the diversification of the trust assets whether these concerns will be upheld.

E. In re Estate of Killey (1974) - Action to surcharge trustee for losses. Industrial Valley Bank and Trust held itself out to be an expert in the management of investments. Beneficiaries wanted to charge bank for failures in the investments.

1. There is an ordinary standard of care for most trustees--must exercise what a person of ordinary prudence would exercise.

2. The bank was held liable for failure to exercise according to stnd.

3. If hold oneself out as an expert, then you're held to a higher stnd.

4. Where a party holds himself out to possess skills and ability superior to that of the ordinary man his actions will be judged by a higher stand. of conduct.

5. This is from the casenote: Normally, financial institutions and other professionals are held to a higher standard of care than a lay executor/trustee.

a. They are normally chosen for their special abilities/knowledge and their activities will be more carefully scrutinized and subjected to a higher stnd. of care even if no such skills have been claimed.

b. By entering the business, they have impliedly claimed such superior abilities.

F. In re Morgan Guaranty Trust Co. (1977) - Cross motions for summary judgment in a trust accounting proceeding. Trustees of Morgan Guaranty Trust Co. contended that they could not be liable for alleged imprudent investments because the entire investment portfolio had grown. Here, objections where raised by a guardian ad litem with respect to the claimed imprudent purchase of certain stocks and bonds in a common trust (which carries with it advantages of economies of scale and stability). The applicable stnd. of care is the prudent man rule. Ct. holds that trustee was meeting the stnd. of care.

1. A trustee may be liable for an imprudent investment even if the entire portfolio shows an increase.

2. Measure the conduct of the trustee, not the performance.

a. If the stock market goes down under the latter, then the co. cannot win.

3. Look at the procedures and decisions to decide if the stnd. of care is met.

4. Here, the bank had elaborate procedures.

5. Look at each indiv. stock (investment), but not in complete isolation.

6. If bank has improperly invested in a stock, then bank can be held accountable.

7. Don't use Standard & Poor's Index to rate investments.

8. Liability is not judged by hindsight but by what the trustees could have reas. known at the time of the challenged decision.

G. In re Estate of Collins (1977) - Appeal of denial of damages for breach of trust. Lamb and Millikan made certain speculative investments as trustees for a trust created by Collins, resulting in depletion of the principle. The trust doc. granted trustee absolute discretion subject to the fiduciary duty. Atty. has clients with promising project. Get a 2nd mort. and 20% of stock of construction co. and personal guarantees. The project folds and the beneficiaries wig.

1. The standard of care is changed by the trust doc. which says absolute discretion.

a. The ct. holds, however, that a grant of absolute discretion cannot free trustee of the obligation of fiduciary duties.

2. Analyze the transaction under the reas. investor rule. Here,

a. All money in one investment--failed to diversify.

b. 2nd mort.--only if a huge margin of safety--here no appraisal.

c. Back up security--stock and guarantees made on unaudited financial statements.

3. When investing in a small company--there is a diff. stnd.

4. Trustees may be held liable for trust depletion resulting from speculative investments.

H. State Street Trust Co. v. De Kalb (1927) - Appeal of award of damages for negligence. Trustees did not act on reas. available info. that property securing a trust fund mortgage was losing value. The trust was created in a will. Looked at the goodness of the security. Invested in the mortgage of a home (with a balloon payment) which was proper at the time it was made. Over the interim time, neighborhood turned downward. The balloon pymt. was made after 5 yrs. The trustees did nothing to collect on the principal. Then the bank became the trustee. At time it became such, it did not try to collect nor did it try to recover from the trustees. The owner dies, and then the bank tried to get the money out of the property. It could only get $6400 out of the orig. $10K loan.

1. There was liability because the property was held onto. The bank was really liable for the loss that occurred after it became trustee.

a. The ct. held that bank had to pay the entire loss.

2. Even though the trust doc. permitted and investment was proper at the time--still could not hold onto the property longer than was appropriate.

3. Successor trustee has obligations when it becomes trustee:

a. If the investment is not proper, needs to try to recover and collect from the first trustees.

4. Casenote: Trustees may be liable for not acting on reasonably available info. that property securing a trust fund mortgage was losing value.

5. Liability in this area is not easy to establish. Most trusts leave trustees with very broad discretion in managing assets. Liability usually must be based on abuse of discretion, which is often hard to show. The standard is often closer to recklessness than mere negligence.

I. In re Trusteeship Under Agreement with Mayo (1960) - Action seeking an order authorizing the trustees to deviate from the settlor's investment restrictions. One of Mayo Trust's beneficiaries alleges that unless the trustees are allowed to deviate from the trust's investment restrictions and invest in corporate stocks, the ultimate beneficiaries of the stock will be presented with assets having less than 1/4th the value they had at the time of Mayo's death. The issue is whether a trustee can invest in investments specifically prohibited in the trust document. Supposed to invest in other than real estate or corp. stock. The bene.s wanted to invest in corporate stock to save the trust.

1. Ct.holds that great efforts are to given to the desires of the settlor.

2. The mere fact that more money could be made is not suff. to justify such action.

3. But if the underlying purposes of the trust could not be met, then administrative deviation would allow the trustees to invest in the prohibited investment.

4. Need to go to the ct. first before the trustees can invest in prohibited investments.

5. Casenote: Where by the terms of a trust the scope of investment which would otherwise be proper is restricted, the ct. will permit the trustee to deviate from the trust restriction if owing to changes since the creation of the trust, such as the fall in interest rates, the danger of inflation, and other circumstances, the accomplishment of the purposes of the trust would otherwise be defeated or substantially impaired.

a. Only in exceptional circumstances, such as cases of emergency, urgency or necessity, will deviation from the trust instrument be authorized, and only when it is reas. certain that the purposes of the trust would otherwise be defeated or impaired in carrying out the donor's intention.

b. The fact that the donor could have foreseen the changed circumstances is important.

6. Situations where cts. have permitted or directed trustees to deviate from the terms of the trust include:

a. sale of trust property

b. mortgage or pledge or lease of trust property

c. making or retaining of investments etc.

XVII. Trustee Powers and Distributions

A. A trustee has those powers granted by the settlor, and those vested in the trustee by statute, by rules of equity, and by ct. orders.

B. The settlor's grants of power may be set out in express provisions in the trust instrument or they may be implied from the general language of the instrument and the purposes of the trust.

1. The current trend is to enlarge the trustee's pwrs.

C. Powers conferred on a trustee are fiduciary powers whose exercise is subject to review by a ct.

D. Powers reserved by a settlor are not fiduciary powers and not subject to such review, even though the settlor may also be the trustee.

1. Ordinarily powers reserved are held in a fiduciary capacity, and have been reserved only because of some special talent or particular source of knowledge of the grantor.

2. If they have been so reserved, the exercise of them is subject to court scrutiny, but if they have been reserved by the grantor for his own purposes, they are subject to no control in their exercise.

E. In re Wellman's Well (1956) - Appeal from probate approval of trustee's accounting. Remainderman of a testamentary trust brought an action against trustee, who sold trust property consisting of stocks in order to make a cash distribution to the beneficiaries. The will did not confer any express powers upon the trustee.

1. A trustee has the implied power to sell trust assets, where there is no express powers granted to the trustee, and where such a sale is for the benefit of the trust.

2. Power to sell the stock could be inferred from both the fact that he was given the power to invade (sell) the principal in order to provide for the widow, and also the nature of the property was such that it would be unrealistic to assume that the testator never intended a sale of the stock to be made.

3. The question of whether the trustee had the power to sell the stock is different from the issue of whether it was proper for the trustee to make the sale.

4. Whether the trustee had duty to distribute the property in kind, or to sell it and deliver the proceeds, depends on whether there is only one beneficiary, or whether, if more than one, they can all agree as to the mode of distrib., and whether the property is such that a division in kind can be made.

5. Inherent power--all powers necessary to accomplish purpose as long as not prohibited by trust statements.

6. The general rule is that a trustee cannot sell property without intent or statute but, inherent power found here.

a. The nature of the property was such that the trust would be at risk if the trustee could not sell.

7. Invasion power is given in the trust document during the life of the beneficiary.

8. Factors in deciding whether trust assets should be distributed in cash or in kind.

a. Whether the trust instrument makes provision, expressly or by implication, as to the mode of distribution;

b. Whether a single person is entitled to the estate or whether there are several beneficiaries;

(1) If so do they all agree to the mode of distribution;

c. Whether the trust estate consists of or includes land, fungible personal property, or non-fungible personal property;

d. Whether a division in kind is practicable;

e. Whether the trust is terminable in part or wholly terminable;

f. Whether the distributees, or some of them, take beneficially or in trust.

9. Cts. are more inclined to find a power to sell personal property, especially securities, than realty.

F. Watling v. Watling (1928) - Action to obtain trust corpus. Watling left a trust for the care of his insane daughter, the trustee having the absolute discretion to turn over the corpus to the daughter.

1. Merely because a trustee has the absolute power to turn over the assets to the beneficiary does not mean that a court can compel him to do so absent a showing of a dishonest exercise of the discretion.

2. The existence of discretionary powers merely grants the trustee the authority to do a certain act if he deems it warranted under the circumstances.

3. Failure to exercise the discretion is not a breach of fiduciary duty in any but exceptional cases.

4. The trustee must merely exhibit that he has considered and rejected the exercise of the power for rational reasons.

5. There was a question whether the brother had a personal power or a transferable one. Ct. held not personal because it was not limited by the trust document.

6. If the trust was conditional upon the occurrence of an event, then ct. could have ordered distribution.

7. Grounds to complain include bad faith etc.

8. Occasionally, the settlor may make a power personal to one trustee; or jointly personal to two or more trustees; or personal to a trustee and her successor appointed by a given method.

9. If the settlor named a corporate trustee this is persuasive that she meant the powers to be attached to the office.

10. When the trustee must exercise the power upon the happening of a condition precedent, the court will compel the exercise of power if convinced that the event has happened.

11. When the trustee is to ascertain the condition, the trustee's determination that the condition exists will not be disturbed by the court if it is in good faith.

12. No matter how absolute, the trustee's discretion cannot be employed to cancel the intention of the settlor or defeat the purpose of the trust.

13. When the trustee is given discretion to make distributions to herself, courts and statutes frequently limit the discretion.

14. If the trustee fails or refuses to exercise her discretion, the court may direct her to do so.

a. The ct. will not ordinarily direct the trustee how to use her discretion.

G. Allard v. Pacific National Bank (1983) - Appeal of denial of damages for breach of fiduciary duty. Pac. Nat. Bank, trustee of a trust, sold a building comprising a substantial trust asset without first informing the beneficiaries.

1. A trustee is under a duty to inform beneficiaries prior to sale of a substantial trust asset.

2. The high duty of loyalty and good faith does require disclosure on any intention to sell a major asset.

a. This disclosure provides the beneficiary the opportunity to either line up a buyer at a higher price or to outbid the seller.

3. Here, the bank neither placed the property on the market nor obtained an appraisal. Ct. held this to have been improper as well. Without one or the other, the price realized could not be considered to be maximized.

4. A trustee has obligation to get the highest price available.

5. If beneficiaries give consent, unless not fully informed, they cannot attack the sale.

6. Even when the trustee has no power of sale, a beneficiary may be precluded from objecting to a sale by consenting or acquiescing later.

H. A well-drawn trust instrument will expressly grant suitable powers to the trustee so that cts. don't have to guess what the settlor intended.

I. There is an inference that the trustee has a power to sell real property unless it appears from the language of the trust instrument as interpreted in the light of all the circumstances that the settlor intended that the land should be retained in the trust.

J. In re Trust Estate of Strauss (1960) - Action to have the ct. vacate a sale of trust property and to approve a subsequent sale. The trustee had agreed to sell the trust property, but later found a party who was willing to pay more for it. The trust doc. stated that ct. approval was needed.

1. A ct. may not vacate a sale of trust property that is yet unconfirmed where there is no showing of mistake, misapprehension or inadvertence to enable the trustee to accept a higher offer.

2. Before a ct. may vacate an agreement to buy trust property, it must be shown that there was some form of mistake, misapprehension or inadvertence involved in the sale.

3. There is a public policy in having stability of contracts which are made w/ trustees in good faith and for adequate compensation.

4. It doesn't make any difference whether the sale is public or private.

5. This case is the majority rule.

6. Trust sales would be subject to risk of the ct. disallowing a sales agreement.

a. This may result in lower prices for such sales, or

b. Subject the trustee to damages.

7. Since the interests of the bene.s are paramount, the ct. can set aside a sale because the price in grossly inadequate.

8. Court approval of a sale K is only necessary if required by the settlor, court, or statute.

9. When a trustee sells property of the estate, she has an obligation to secure the best price obtainable under the circumstances.

K. Russell v. Russell (1929) - A suit to determine if the trustee can rent the trust property and for how long. the trustee felt that the trust property would be more valuable if rented beyond the duration of the trust.

1. Trustees have an implied power to rent the trust property for a period of time less than the duration of the trust and may do so beyond the trust limits if it appears that it is reas. necessary for the accomplishment of the purposes of the trust or the preservation of the trust property.

a. Even if no power to do so was expressly granted to the trustee. It is considered an implied power.

2. Most cts. will authorize long-term leases which will beyond the probable or certain duration of the trust as long as there is a suff. reason to do so.

3. In granting such a lease, most cts. require that the trustee have permission to do so from the ct. or have the authority to do so from the trust instrument.

4. The power to lease

a. If extends only as long as trust duration, then would be approved.

b. If extends beyond life of trust--other factors must be weighed.

(1) reas. necessary to carry out the purposes of the trust;

(2) if unable to lease otherwise;

(3) ct. worried about whether life beneficiaries and remainder interests are protected under the lease agreement.

c. Long-term leases have a 2nd more minor inquiry, does the long term lease shift the benefits forward to the early yrs. of the lease.

(1) The nature of the property or surrounding area may change making the property considerably less valuable.

(2) Where exigencies arise after the death of a testator which would practically defeat the trust, equitable relief will be given so as to accomplish the purposes of the testator.

d. The power to lease carries with it such powers as are necessary to make effective the power to lease, as, for example the power to improve the premises when that is necessary to make them rentable.

e. A lease made by a trustee in the exercise of reas. prudence will be approved by the court.

f. A settlor may expressly grant a power to lease. Even without express authorization, when a trustee is directed to hold realty in trust, a power to lease is easily implied from instructions to pay over the income of the trust property, or from authorization to manage and control the property.

L. Young v. Young (1931) - Action to force a purchaser of trust property to fulfill his purchase agreement. Young, the trustee, wanted to sell trust property which had been damaged by fire and rendered unproductive.

1. If an unusual exigency arises in regard to the method of handling the property of the trust fund, a ct. may allow the trustee to deviate from the directions of the trustor.

2. Cts. do have the power to allow a trustee to deviate from the directions of the trustor in handling the trust property under the unusual circumstances. This may be necessary to carry out the intentions of the trustor or to preserve the trust property.

3. It is necessary that there be an unusual circumstance arise as the trustee cannot deviate from his directions without a suff. reason.

4. This is the majority rule.

5. The ct. tries to do what grantor would have done if had foreseen the event occurring.

a. The ct. is also trying to protect the trust purpose--beneficiaries.

6. Even when the trust instrument does not forbid a mortgage, the cts. are extremely reluctant to imply this power.

a. The power may be implied when necessary to enable the trustee to conserve the assets of the trust.

7. Cts. have the authority to order the sale of trust assets even when contrary to the trust terms upon proof of compelling circumstances.

M. Payments and distributions to beneficiaries

1. Trustees are under an absolute and unqualified duty to make payments and distributions to the correct beneficiary--rather than merely to use good faith, ordinary care and the advice of counsel.

a. Thus if a trustee pays trust income or principal to the wrong person because of forgery, confusion of identity, misapprehension about the meaning of the trust instrument, or other mistake, she will be required to make good the amt. from her own expenses.

b. If the beneficiary is an adult of normal capacity, a prudent trustee will make payment to her personally and not to any representative.

c. If the beneficiary if a minor or an incompetent, the trustee should make payment to a properly appointed guardian, unless the trustee is authorized to apply the income for the beneficiary's benefit.

(1) The powers and duties of guardians on infants and incompetents are primarily governed by the terms of the appt., and local statutes.

d. If there is reas. doubt about the proper payee or manner of pymt., the trustee should apply to a ct. for guidance.

2. As a general rule, a trustee must make pymt. or distribution exactly as specified in the trust instrument--in cash or in kind.

a. Thus, when a trustee is directed to invest trust proceeds in a commercial annuity that will pay a fixed amt. to a bene. over a period of time, a majority of cases have held that the trustee cannot forego the purchase and give the bene. the lump-sum cost of the annuity, even if the bene. demands it.

b. The trustee cannot change the form of pymt. determined by the trust instrument.

(1) However, cts. sometimes approve a deviation by finding an implied power of sale that would permit a cash distribution or by authorizing a distribution in kind when the trustee can show that such a deviation would serve the best interests of the bene.s w/o frustrating an important purpose of the settlor.

N. Bennett v. Nashville Trust Co. (1913) - Action by a bene. to force the trustee to pay her money prior to the time set forth in the will. Bennett is trying to obtain financial help to finish high school from a trust.

1. A ct. of equity may allow the use of trust income to help a bene. prior to the time set forth in the trust will if exigent circumstances arise which were nonexistent and not anticipated at the time the trust was created.

2. Problems encountered by the bene. must be of a serious nature which really require the help of the trust income.

3. The ct. is really allowing to be done what it feels the testator would have wanted done if he would have foreseen the problem.

4. The distrib. was not enlarging her share of the trust fund and thus did not adversely affect any other party under the trust.

a. The ct. will not do this if any beneficiary is adversely impacted.

5. Most jurisdictions allow trust income to be used prior to the time set forth in the trust instrument in order to pay for the support and education of minor bene.s.

a. Most cts. are more reluctant to exercise this power when the bene. is an adult.

6. A trustee has a rt. to recover from the bene. advances made to her, or excess payments given her, and is entitled to a lien on the bene.'s trust interest, unless the bene. has changed her position in reliance on the overpayment.

O. In re Van Deusen's Estate (1947) - Petition to direct the trustee to pay each beneficiary $200 a month. Two daughters, both bene.s, want the trustee to take money from the trust principal in order to pay them both $200 each month, because the trust income wasn't suff. to may such payments.

1. The ct. will not permit or direct the application of the principal of a trust to the support or education of one bene. where by the terms of the trust, income only is to be applied, if the result would be to deprive another bene. of property.

2. Here, the grandchildren were entitled to the trust principal and the two daughters were entitled only to the income from the principal. Even though Mrs. Van Deusen intended to have her daughters taken care of, the trustee cannot use trust principal which has been set aside for the grandchildren without their consent.

3. The fact that Mrs. Van Deusen intended to changer her will makes no diff. because she didn't actually change it.

4. If the grandchildren had consented the ct. could have done it.

a. If all remaindermen are in existence and are sui juris (can consent) then ct. can modify the trust.

b. Where there is a gift of capital to a class of minors, advances may be made to one minor when her chances of surviving to the date of closing the class are equal to those of the other minor.

XVIII. Delegation to Agents and Cotrustees--What Hansen said we need to know.

A. What kinds of duties can a trustee delegate.

1. Trustee can delegate ministerial duties but cannot delegate duties which req. the exercise of discretion.

2. Where there are cotrustees, they may act jointly or individually.

a. Where their function is not ministerial (no exercise of judgment), a trustee may act w/o his cotrustees.

b. When 3rd persons deal w/ a trustee, it is their obligation to deal w/ all trustees, since each indiv. trustee is liable only if he himself acted in violation of the trust instrument, and such liability extends only to the bene. of the trust. (See Coxe.)

3. If joint trustees--both must act in concert.

B. Coxe v Kriebel (1936) - Action by trustee to have a mortgage, held by the trust, declared a lien on the mortgagor's property. Coxe and Caveny were co-trustees of a trust which held a mortgage on the property of Kriebel. Unbeknown to Coxe, Kriebel gave Caveny a check as satisfaction of the mortgage. Caveny cashed the check and kept the money

1. 1) Where there are cotrustees, the trustees must act in a jnt. capacity, and 3rd parties must deal with all of the trustees. 2) A trustee has a duty to use reas. care in order to prevent his co-trustee from committing a breach of trust.

2. Kriebel's pymt. to Caveny, alone, did not discharge the mortgage unless Caveny was authorized to act for both himself and Coxe.

a. All signatures of the trustees are required when cashing a check, or giving receipt of money.

b. Where the trustees are required to act in a discretionary capacity, all must act jointly.

c. A ministerial function requires only one trustee to act.

3. Since the title to the mortgage was recorded in the name of both Coxe and Caveny, Kriebel was negligent in authorizing pymt. be made to Caveny alone--so Kriebel and not the trustees must bear the loss.

4. A cotrustee owes to his bene. a reas. duty of care to prevent his cotrustee from committing a breach of trust.

5. Since Coxe, once learning of the pymt., acted to correct it, he did not act unreas. and could not be held for the breach of trust committed by his cotrustee.

C. In re Will of Axe (1986) - Trustees' accounting action. Trustees to the testamentary trust of Axe engaged in the services of investment professionals, despite a lack of authorization to do so in the will.

1. Trustees may engage the advice of investment professionals w/o the trust instrument so authorizing.

2. In the normal type of trustee authoriz. situation, the trustee is given the auth. to do all things necessary and proper to manage a will or trust.

3. This is the majority rule. Trustees may retain professionals and charge the trust for their fees.

4. In view of poss. personal liability, in fact, a trustee tempts fate if he fails to do so. A bad investment decision looks better when reliance was given to a professional.

XIX. Duty of Loyalty and Self-Dealing

A. In most transactions, a trustee's acts are governed by a stnd. of reas care, skill, and caution.

1. However, when the trustee's actions are or may be influenced by some interest other than the bene.'s, his actions could be viewed as disloyal.

2. Hence, the duty is measured by a more rigorous stnd.

B. Self-dealing, the most common form of trustee disloyalty, occurs when the trustee attempts to gain advantage for himself or his associates or relatives while transacting business for the trust.

1. The stnd. of loyalty in trust relations does not permit a trustee to create or to occupy a position in which he has interest to serve other than the interest of the trust estate.

2. Undivided loyalty is the supreme test.

3. Despite these assurances, the rule is not unbending and inveterate. The cts. create exceptions as they consider the basic policy objectives of the rule.

C. Magruder v Drury (1914) - Suit to hold a trustee liable for profits he made in dealing with the trust estate. Drury, a trustee, was also a member of a firm which sold real estate mortgages to the trust.

1. A trustee is not allowed to act in any transaction in which he, as a private individual, either buys from or sells to the trust even if the trust doesn't lose any money in the deal.

2. The trustee is not allowed to act in any way which would interfere with his responsibility to faithfully discharge his duties as trustee.

3. This case represents the now majority view.

4. Absent a statute, the general rule is that a bene. may have a transaction set aside or recover any profit gained by the trustee if the trustee has been a party to a transaction with the trust.

5. A conflict of interest may arise where the trustee is on both sides of the transaction.

6. The rule against self-dealing applies to a purchase by a trustee from his cotrustee, and to purchases from officers or directors or from an affiliated or subsidiary corp. of the corp. trustee.

7. Trustee is also prohibited from lending trust funds to himself or, if a corporate trustee, to affiliates, directors or officers.

8. Self-dealing rules are harsh.

a. Bene.s never lose with these situations.

b. Have to prove self-dealing, then get any profits.

D. Matter of Rothko's Estate (1977) - Appeal of award of damages for breach of fiduciary duty. Estate trustees found to have breached fiduciary duties in selling painting were assessed damages including post-sale appreciation. Here, the trustees sold even after the ct. ordered them not to.

1. Damages assessable for breach of fiduciary duty involving the sale of property includes post-sale appreciation.

2. When a trustee has the power to sell an article and the sale price is too low, damages are assessed as of the time of the sale only, and any appreciation between the sale and judgment is not chargeable to the trustee.

a. However, this rule applies only when the trustee's only bad act was selling at too low a price.

b. When such sale is accompanied with some other act of misfeasance, the contrary result occurs.

c. The reason for this dichotomy is that imposing appreciation damages on a trustee whose only crime was not getting a bargain would discourage legitimate sales. Where the trustee has committed breaches of a more serious nature, this policy becomes void, and the trustee is properly fully liable.

3. Advice of counsel is not a defense because the 3rd trustee was acting in a business capacity not a legal one.

4. As to the duty of loyalty, executors are customarily held to the same standard as trustees.

5. A trustee is under a duty not to compete with the trust.

6. Most cts. hold a sale of trust property to the trustee himself subject to the bene.'s attack whether the sale is public or private.

a. The fairness of the sale is not gen. relevant.

b. Majority also hold that a trustee is prohibited from buying at a forced sale, even though he may have less control over the circumstances than with other sales.

7. A trustee may not use the trust property for his own purposes.

8. A trustee is also prohibited from selling or leasing his own property to the trust.

9. Nor may the trustee purchase property for himself that it is his duty to purchase for the trust.

10. UPC 3-713 provides that nay sale or encumbrance to the executor or other personal rep. (or his spouse, agent, atty., or any entity in which he has a substantial beneficial interest) is "voidable by any person interested in the estate except one who has consented after fair disclosure, unless 1) the will or contract entered into by the decedent expressly authorized the transaction; or 2) the transaction is approved by the ct. after notice to interested persons."

11. If the trust estate includes property which is subject to an encumbrance, the trustee violates his duty to the bene. if he purchases the encumbrance for himself indiv. Rest. Tr. 2d 170

12. A former trustee may usually purchase an interest in the trust property, unless his purchase is unfair because of the fiduciary relationship.

13. When a trustee engages in self-dealing, a beneficiary may set aside the transaction, or in the alternative, may elect to affirm the transaction and recover any profit gained by the trustee.

14. The ct. may also reform the trustee's price to reflect the true property value.

15. The bene. may seek to have the trustee removed or to have the trustee's compensation denied, or to have a constructive trust imposed on the property or profits.

E. Mosser v. Darrow (1951) - Action to hold a trustee liable for money his agents made at the expense of the trust. Darrow, as trustee, allowed his agents to invest bonds that they sold to the trust.

1. A trustee is liable for the actions of his agents that cause a loss to the trust, even though the trustee doesn't profit from their actions.

2. When the loss to the trust results from the actions of an agent of the trustee and that loss is to the trust res instead of to poss. profits as in the above case, the trustee will not be held liable if he used reas. case in delegating the duties to the agent and if the duties he delegated to the trustee could be properly delegated to an agent.

3. Darrow was held personally liable for the profits made by his agents because he put these people in a position to make money.

F. First Nat. Bank v. Basham (1939) - Action to hold a trustee liable for losses to the trust estate. First Nat. Bank, as trustee, invested trust money into mortgages which ended up losing money.

1. A trustee is not allowed to act for himself in any transaction in which the trust is a party. When a trustee is the trustee of two trusts and he enters into a transaction involving dealings between the two trusts, he must justify the transaction as being fair to each trust or he cannot properly act w/o instructions from the ct.

2. First Nat. Bank was not guilty of any self-dealing in this case. There was actually a benefit to the trust that did not result in any loss to be able to use the Bank's money in making loans until there were trust funds available to make the loans.

3. The trustee is not req'd to make sure one trust sells for the highest price available when selling to another trust if he is the trustee of both.

a. All that is req'd is that the trustee make sure the deal is fair to both parties, as it was in this case.

4. The bank was found free of self-dealing in the first transaction because:

a. It's a bank & subj. to regulations & control.

(1) Banks are given much more flexibility than an indiv. trustee in this situat.

b. It was done for the benefit of the trust.

(1) The bank advanced money to get into good trusts.

5. The bank in the second transaction (being the trustee of two trusts and entering transactions involving the two trusts) has the burden of proof to show that it was fair to both trusts.

a. Trustee is in fiduciary posit. on both sides of the transaction.

b. Cannot get gain himself.

c. Doesn't matter that it's a bank here.

6. This case represents the majority rule.

G. Norris v. Bishop (1925) - Appeal of a decision granting atty. fees to a trustee. Norris created a trust in which he provided a cemetery, but revoked the trust because nobody used it.

1. When there are 2 or more trustees and one of them performs legal services for the trust in a ct., he may be entitled to compensation.

2. The cts. that do allow compensation do not allow him the usual professional charges for his services, but determine compensation in view of the circumstances of the case.

3. The cts. usually req. that the services be rendered in good faith and be necessary for the protection of the trust.

4. An atty. may also have a conflict of interest when he drafts estate plan instruments naming himself as executor or trustee.

5. Notes from Hansen: Remember the obligat. of the trustee to defend trust against other persons including the settlor.

6. Issue whether atty. trustee can be pd.

a. No recovery view--like self-dealing--trustee cannot give subjective judgment about who should represent the trust (he has no objective opinion).

b. Recovery view--as long as capable in the area and fees are reas. in the circumstances.

H. Prueter v. Bork (1981) - Appeal of defense judgment in action seeking damages for breach of fiduciary duty. Herman Prueter, trustee of a trust he set up for his son, Ervin, convinced him to revoke the trust in favor of a second trust with terms less favorable to him.

1. A trustee may not attempt to obtain a bene.'s revocation of a trust to substitute a trust with less favorable terms.

2. The duty of loyalty owed by a trustee to a bene. is more intense than any other fiduciary relationship.

3. Any transaction benefitting the trustee is presumed to be fraudulent.

a. Rebuttal of this presumption requires a showing that the transaction was fair and that no duty of loyalty was breached.

4. Here there was an issue whether the son's rt. was real or illusory.

5. Herman never read the terms of the new trust, so did not realize that it was revocable.

a. Normally the law would not protect one so unwise; however, when a fiduciary benefits from an executed document, a presumption arises that the doc. is invalid.

(1) To rebut this, it must be shown that full and fair disclosure was made.

6. To protect a beneficiary as well as the settlor (or fiduciary) when modifying a trust agreement make sure that the following 3 steps occur:

a. Trustee has made full disclosure of all relevant information.

b. Consideration is adequate.

c. Beneficiary had competent & indep. counsel before completing the transaction.

7. The trustee's purchase or use of trust property may be validated by the bene.'s consent but only after full disclosure.

8. A trustee's purchase may also be validated by permission in the trust instrument if the trustee acts in good faith.

9. A ct. order before or after the sale may also cure the objection.

10. Gifts to persons in a fiduciary or confidential relation to the donor (trustees, executors, guardians, attys., for example) will be set aside, unless the donee can prove indep., well-considered action.

a. An important fact is whether the gift was solicited.

XX. Contract and Tort Liability--What Reese said we need to know

A. Regarding liability of trustee with respect to Ks entered into or torts that occur by trustee or agents

B. K liability--under common law--K binds trustee personally and damages are collected out of his own property.

C. Equity, however, states that trustee has rt. to reimbursement for fees or judgments pd. on behalf of the trust.

D. Judgment against trustee personally:

1. Smith v. Chambers (1936) - An action to invalidate levies on trust property in satisfaction of judgments against the trustee. A judgment was obtained against Smith, the trustee, and Chambers, the constable, was attempting to levy against the trust property to satisfy it.

a. A person to whom the trustee has become liable cannot reach trust property in an action at law against the trustee, although the liability was properly incurred by the trustee in the course of the administration of the trust.

b. From Hansen: the ct. held that have to collect from the trustee, not from the trust assets.

(1) This is because the trustee had not contracted against personal liability.

(2) If contracted against personal liability, then damages come out of trust assets.

2. James Stewart & Co., Inc. v. Nat. Shawmut Bank (1935) - Action to enforce a K against a trustee. Stewart & Co. is attempting to hold Shawmut Bank liable for a K they signed as a trustee.

a. When a trustee signs a contract in which the other party has notice that the trustees are not personally liable for the K, the trustees cannot be held liable under the K.

b. Here the trustees were relieved of personal liability under the construction K which referenced the trust doc.

c. As long as the conduct of the trustee is proper, most cts. will not hold him liable if he contracts against personal liability.

d. From Hansen: A K to avoid personal liability can be explicit in agreement between trustee and seller; or the trust doc. can state that trustee is not personally liable & K referred to trust doc.

e. Derivative rt. theory--sometimes trustee is judgment proof.

(1) Then creditor is able to access trust assets through the shoes of the trustee.

(2) Subject to any offset that the trust has against the trustee.

(3) Cts. state that have to show an attempt at collection and be unsuccessful.

(4) The UPC presumes that the trustee is not personally liable.

f. Bene. liability--if trustee & trust are w/o suff. assets? NO! Beneficiaries do NOT have to pay. An agency argument does not work. It is not an agency, but a trust relationship.

g. Tort--trustee is personally liable

(1) For torts committed under a trust K

(a) Such as to K creditors;

(2) For damages arising from torts committed in the administration of the trust.

(3) Where a trustee pays, he is entitled to reimbursement under the following:

(a) Trustee not personally liable (at fault) himself for the act;

(b) Where even though personally at fault, tort occurred as part of normal incident of what trust is engaged in;

(c) Where commission of tort, increases the value of the tort property.

i) i.e., commingled or converted assets become identified with trust and increases value

(4) Trustee is liable under traditional respondeat superior analysis even where trust estate will be insuff. for reimbursement.

h. Charitable immunity has been abandoned by the majority of states.

XXI. Chapter 21 Principal and Income

A. Trustee obligated to treat both beneficiaries equally.

1. Trustee might purchase high risk high income assets--this would benefit the present beneficiary.

2. Quest.--is the receipt of money to be considered as income, or is it considered principal to be distributed to remainder beneficiary.

a. Unif. Principal & Income Act (revised) governs.

3. Dividends--AT&T stock--income payable to Y or X. There are expenses to maintenance the trust. Comes out of Y, or the principal.

4. Cash dividends are held to be income unless it is payable upon the termination of business.

5. Stock dividends--held to be principal if stock of company held by trustee.

a. If dividend of subsidiary--held income unless distribution is of partial dissolution of company.

6. Depleting assets--oil well--getting a royalty. Income or principal.

7. Be aware of accounting problems and attribution problems that trustee must be aware of.

B. NOT ON EXAM

XXII. Chap. 23 Alteration of Trusts By the Court--deviation and cy pres

A. In a private trust, cts. will not allow deviation from the settlor's provisions identifying the beneficiaries and describing the nature of their interests in the trust property.

B. Because charitable trust can be of indefinite duration and implementing the orig. provisions may become imposs., illegal or impracticable, the ct. may be obliged to choose between allowing the trust to fail and applying the property to another charit. purpose which still accomplishes the settlor's general intent.

1. This second option is accomplished by using cy pres. which is the ct's. power to carry out a charitable donor's intention as nearly as poss.

2. To exercise judicial cy pres the ct. must find that a donor of property to charity has a gen. charit. intent, which is a primary purpose of either charity in general or some stnd. type of charity, and a secondary purpose of achieving that result through a specific designated meth.

3. When the meth. the settlor has designated becomes imposs. or impracticable to accomplish, the ct. assumes that the donor would want to have the property applied to some kindred charitable object within the range of the gen. charit. intent and as nearly like the orig. plan as poss.

4. Although the master and the cts. have wide discretion in selecting a substitute scheme, they should always attempt to determine the gen. intent of the settlor and devise a scheme within that intent and as close as poss. to the orig. desig.

5. Cts. are more inclined to apply cy pres when the imposs. or impracticality of carrying out the settlor's intent appears long after the trust creation than when it is evident at the start.

6. The cy pres power is applied to absolute gifts to charitable corporations as well as to gifts in trust.