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Lecture Notes Chapter 13 I

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Lecture Notes Chapter 13 I LECTURE NOTES CHAPTER 13 I. Scope of the Chapter A. Various kinds of trusts, including living trusts, are identified and discussed. B. The classification of trusts and an examination of a private express trust lead to a detailed discussion of the living trust. C. The steps necessary for drafting trusts, including the accumulation of data through appropriate checklists, are outlined. II. Classification of Trusts A. All trusts are either express or implied. 1. An express trust is created or declared in explicit terms for specific purposes and is represented by a written document or an oral declaration. a. Express trusts fall into the following subcategories. (1) Private or public (charitable) trusts (2) Active or passive trusts (3) Inter vivos or living trusts b. The most common types of express trusts are testamentary and living trusts. 2. Implied trusts are created not by the settlor’s express terms but by the presumed intent of the settlor or by a decree of the court. B. Express Trusts—Private versus Public (Charitable) 1. A private trust is created expressly either orally or in writing between a settlor and a trustee(s) who holds legal title to property for the financial benefit of a beneficiary. a. It is one of the most common types of trusts. b. The essential elements of an express private trust are as follows. (1) The settlor must intend to create a private trust. (2) A trustee must be named to administer the trust. (3) A beneficiary must be named to enforce the trust. (4) The settlor must transfer sufficiently identified property to the trust. 2. A public or charitable trust is an express trust established for the purpose of accomplishing social benefit for the public or the community. a. The beneficiary does not always have to be the general public. b. The trust must be designated either for the benefit of the general public or a reasonably large, indefinite class of persons within the public who may be personally unknown to the settlor. c. In the majority of states, the true test for creation of a valid public trust is not the indefiniteness of the persons aided by the trust but rather the amount of social benefit that accrues to the public. d. The purpose of the charitable trust must not include profit-making by the settlor, trustee, or other persons. e. The essential elements of an express public or charitable trust are as follows. • The settlor must intend to create a public trust. • A trustee must be named to administer the trust. • Property must be transferred to the trust. • A charitable purpose must be expressly designated. • The general public must be benefited. • An indefinite class of persons must be named beneficiaries. 3. The doctrine of cy-pres means that where a testator or settlor makes a gift to charity or for a charitable purpose and it subsequently becomes impossible or impractical to apply the gift to that particular charity, the court may order the gift applied to another charity “as near as possible” to the one designated by the settlor, and no contrary intent by the settlor is apparent. a. The doctrine is only applied to public charitable trusts. b. The rationale is to continue the operation of charitable trusts so as not to terminate public benefits. c. For the doctrine to apply, the settlor’s intent must be broad and general and not restricted to one specific objective or to one particular method of accomplishing the purpose of the trust. C. Express Trusts—Active versus Passive 1. The features that distinguish active trusts from passive trusts are the obligations of management and administration that active trusts impose on the trustee. a. Express trusts are active trusts. b. Implied trusts are passive trusts. 2. An express private active trust must give oral or written affirmative powers and duties to a trustee to perform discretionary acts of management or administration for the benefit of named beneficiaries. 3. For a passive trust, the trustee has no responsibilities or discretionary duties to perform. a. The mere holding of the trust property for the beneficiary with no obligations or powers to administer the trust indicates that the trust is passive. b. Passive trusts result from the failure of the settlor to create an active trust, either accidentally or deliberately. D. Express Trusts—Inter Vivos (Living) versus Testamentary 1. The most common types of express trusts are living trusts and testamentary trusts. 2. The criterion for whether a trust is living or testamentary will be the time the trust became effective. 3. Both types of trusts are often used to conserve property for the benefit of a surviving spouse and children or for the children of a single parent. 4. An inter vivos trust allows the settlor to see how well the trust operates while he/she is still alive. 5. Testamentary trusts are probated; living trusts are not probated. E. Rule Against Perpetuities 1. The rule places a term (time limitation) on how long a private, noncharitable trust may exist. 2. An interest in property must take effect no later than 21 years, plus the period of gestation, after some life or lives in being at the time of the creation of the interest. 3. Charitable trusts have an unlimited duration. F. Implied Trusts—Resulting and Constructive 1. Implied trusts are passive trusts imposed on property by the courts when trust intent is lacking. 2. Implied trusts are created by operation of law. 3. Resulting trusts are created because of inferred or presumed intent of a property owner, generally in three types of situations. a. The purchase-money resulting trust. When one person’s money has paid for land or personal property, but the legal title is conveyed to another person, the law presumes that a purchase-money resulting trust has been created for the benefit of the person who paid the money. (1) The person who paid the money received equitable title to the property. (2) The person to whom the property was conveyed is considered the trustee. (3) Since it is created by implication and operation of law, a purchase-money resulting trust need not be evidenced by writing. (4) The evidence must be clear and convincing for the court to establish a resulting trust, and the burden of proof rests on the party seeking to establish the resulting trust. (5) The court allows parol evidence to be used in these cases. (6) The grounds for the court’s presuming a purchase-money resulting trust are that a person who furnishes consideration for a conveyance to another probably does so for reasons other than gift giving. (7) Several states have abolished or modified purchase-money resulting trusts. b. The failed trust. When a settlor creates an express private trust gratuitously and the trust fails or is declared void for any reason except that it has an illegal objective, a resulting trust arises for the benefit of the settlor or his/her successors. (1) If the private express trust was created for an illegal purpose, then the court generally does not decree a resulting trust but instead declares the trust void. (2) When a charitable trust fails and the court cannot apply the cy-pres doctrine, the property is held by the trustee for the benefit of the original settlor or the settlor’s successors in a resulting trust. c. The excessive endowment trust. When the property of a private express trust exceeds what is needed for the purpose intended by the settlor, or some part of the trust property remains after the trust has ended, the court may establish a resulting trust for the benefit of the settlor or his/her successors. 4. A constructive trust is a creation of the court and is established for the purpose of rectifying a serious wrong such as fraud, duress, unconscionable conduct, or preventing unjust enrichment of the wrongdoer. a. When someone acquires title by unlawful or unfair means or by breach of duty as trustee, the court will construct a trust for the benefit of the person rightfully entitled to the property. (1) The wrongdoer holds the property as a constructive trustee. (2) The constructive trustee has no administrative duty other than the obligation to transfer the title and possession to the proper person. —TEACHING SUGGESTION: Review the major types of trusts to ensure student comprehension (Exhibit 13.2). G. Miscellaneous Trusts 1. A spendthrift trust is created to provide a fund for the maintenance of a beneficiary while safeguarding the fund against the beneficiary’s own extravagance or inexperience in spending money. a. Only a certain portion of the total amount of the funds is given to the spendthrift beneficiary at any one time. b. The trust provides that the beneficiary cannot assign to anyone the right to receive future payments of income or principal from the trust. c. The settlor declares that creditors of the spendthrift cannot reach the trust benefits by obtaining a court order awarding them to the creditors. d. The protection of the spendthrift trust ends once the beneficiary actually receives the distribution of the trust income. e. Some states allow creditors to reach the beneficiary’s interest despite the spendthrift clause if they have supplied “necessities” to the beneficiary. 2. A Totten trust, also called a payable- or pay-on-death (POD) account, is a savings account in which money is deposited in the depositor’s name as trustee for another person named as beneficiary. a. Such deposits permit the depositor-trustee to withdraw money while alive and allow any remaining balance to be transferred to the beneficiary after the depositor’s death.
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