CA Trusts

Concepts in the Law of Trusts

1. Private Express Trust
2. Charitable Trust
3. Pour-over Wills
4. Miscellaneous Trusts
5. Restraints on Alienation
6. Resulting Trusts
7. Constructive Trusts
8. Trustee Powers and Duties
9. Modification and Termination of Trusts
10. Income v. Principal P

PRIVATE EXPRESS TRUSTS
Issues to REMEMBER

1. Private express trust defined
2. Property of the trust, or corpus
3. The beneficiary
4. The trustee
5. Manifestation of Intent
6. Creation
7. Legal Purpose
ALL VERY HEAVILY TESTED.

PRIVATE EXPRESS TRUSTS
Definition of private express trust (PET)

Fiduciary relationship with respect to property whereby one person, the TRUSTEE, holds legal title for the benefit of another, the BENEFICIARY, and which arises out of a manifestation of intent to create it for a legal purpose
***
EXAM: MUST MEMORIZE THIS

PRIVATE EXPRESS TRUSTS
What kind of property is covered by PET? What kind not?

RULE: any presently existing interest in property that can be transferred can be the corpus of a trust. EXS:
--Fee simple
--Future Interest
--Life insurance policy
--Bonds
--Stocks
RULE: Illusory interests CANNOT be the subject matter of a trust. EXs:
--F

Private Express Trusts
The Beneficiary: Who can be the Beneficiary of a private express trust?

RULE: any ascertainable prsn or group of ppl can. Person INCLUDES:
--corporations
--unincorporated associations (CL could NOT be the beneficiary of a PET but now they can)
--Class gifts= valid BUT watch out for class that is too big because even if ascert

Private Express Trusts
Trustee

RULE: A trust MUST have a trustee, but the court will not allow the trust to fail solely bc no trustee or trustee refuses to serve.
--Court will appoint a trustee
--Until a trustee is appointed, the settlor or the settlor's estate will hold legal title.

Private Express Trusts
Manifestation of Trust Intent

RULE: there must be PRESENT manifestation of trust intent made by the settlor. CANNOT manifest an intent for a trust to arise in the future.
--BUT no magic words needed to create a trust.
--RULE: precatory words by themselves are NOT sufficient to create

Private Express Trusts
Manifestation of Trust Intent: Precatory words

Words of wish, hope, or desire. They are not mandatory words, which is required for a trust.
EX 1: S gives $100K to his bro with " the direction and order that he use it for my sister."
--words=mandatory NOT precatory= trust
EX 2: S gives $100K to his bro

Private Express Trusts
Manifestation of Trust Intent: Trusts of Personal Property

DO NOT HAVE TO BE IN WRITING. The s/f applies only to REAL PROPERTY.

Private Express Trusts
How to create a private express trust

TWO TIME FRAMES ARE IMPORTANT:
1. A trust created to take effect at settlor's death
2. A trust created to take effect during settlor's lifetime.

Private Express Trusts
How to create a private express trust: Trust created to take effect at settlor's death

1. Comply with Statute of Wills--the local probate code.
2. A part of T's will has a provision for a testamentary trust (one which takes effect at T's death).

Private Express Trusts
How to create a private express trust: Trust created to take effect during settlor's lifetime

TWO WAYS TO ACCOMPLISH THIS:
1. Transfer in Trust
2. Declaration in Trust

Private Express Trusts
How to create a private express trust: Trust created to take effect during settlor's lifetime: TRANSFER IN TRUST

a THIRD PERSON is trustee:
1. If for REAL PROPERTY: settlor must execute and deliver a deed transferring title to the trustee. The writing requirement is bc of s/f.
2. if for PERSONAL PROP: must be delivery to the trustee of the trust property at the time

Private Express Trusts
How to create a private express trust: Trust created to take effect during settlor's lifetime: DECLARATION IN TRUST

SETTLOR HERSELF IS THE TRUSTEE
1. If for REAL PROPERTY: must be some writing satisfying the s/f indicating that settlor also is the trustee.
2. If for PERSONAL PROP: there is NO issue of delivery. So, only have to look out for the present manifestation of

Private Express Trusts
Legal Purpose

RULE: A trust may be established for any legal purpose. If ILLEGAL purpose or Violative of public policy: LOOK FOR
1. Illegality at creation: Excise illicit condition. IF can't THEN:
--TWO OPTIONS: a) invalidate the trust at its
inception, settlor remains

CHARITABLE TRUSTS

1. Definition
2. Creation
3. Beneficiary
4. RAP
5. Cy Pres

Charitable Trusts
Definition of Charitable Trust

Statute of Elizabeth= trusts for: education, alleviation of poverty, alleviation of sickness, to help orphans.
Restatement= any trust which confers a substantial benefit upon society.
EX: help the poor, advance education, help the sick, promote religion.

Charitable Trusts
Creation of a Charitable Trust

CREATED the same way as Private Express Trust.
1. manifestation of trust intent, cna be done at T's death by wil OR during settlor's lifetime by declaration of trust or transfer in trust
2. of a presently existing interest in property that can be transfer

Charitable Trusts
Beneficiary of a Charitable Trust

NO ascertainable person or group of ppl because society is the beneficiary.
--while individual may receive an incidental benefit, focus is on society.
SPLIT OF AUTHORITY on whether a trust to a small group of people is a charitable or private express trus

Charitable Trusts
RAP

DOES NOT APPLY TO CHARITABLE TRUSTS.

Charitable Trusts
Cy Pres: When does it arise?

If charitable trust is impossible to carry out (bc no money, for ex) THEN two alternative solutions:
1. A resulting trust: corpus is returned to settlor if alive and if not to settlor's estate.
2. Cy Pres

Charitable Trusts
Cy Pres means?

As nearly as Possible
If court finds that settlor had a general charitable intent and only the mechanism for effectuating that intent is not possible or practicable, the court can MODIFY THE MECHANISM, cy pres, to effectuate settlor's general intent.
-ONL

Charitable Trusts
Cy Pres: How do we know if settlor's charitable intent was general or specific?

INTRODUCE both intrinsic evidence (the trust instrument) and extrinsic evidence to ascertain settlor's intent.
REMEMBER: if specific charitable intent, cy pres cannot be used.

Pour-Over Wills
Generally

SCENARIO: settlor creates an inter-vivos trust, with a provision in her will devising part or all of the estate to the trustee of the trust.
POUR-OVER provisions are validated in 3 ways:
1. Incorporation by reference
2. Facts of independent significance A

Miscellaneous Trusts

1. Honorary Trusts
2. Totten Trusts

Miscellaneous Trusts
Honorary Trusts

A trust which has no ascertainable beneficiary AND confers no substantial benefit upon society.
--can NOT be PET bc no ascertainable beneficiary.
--can NOT be Ch. Trust bc NO sub benefit to soc
IT IS simply a GOAL of the settlor: trustee is NOT required t

Miscellaneous Trusts
Honorary Trusts: PROBLEMS

1. Trustee may refuse to carry out S's wishes, then trust fails.
--and have resulting trust in favor of S, or if dead, to S's estate.
2. Typically there is a RAP problem w/ them bc there is no measuring life.
--BUT some courts allow them to endure for 21

Miscellaneous Trusts
Totten Trust

AKA tentative bank account trust
The named beneficiary takes whatever is left int he account at death of the owner of the account.
1. NOT A TRUE trust, really just a will substitute.
2. Always a type of savings account with a bank or other financial insti

Restraints on Alienation

1. Intro to the problem
2. Spendthrift Trusts (*
HEAVILY TESTED
*)
3. Support Trusts
4. Discretionary Trusts (*
HEAVILY TESTED
*)

Restraints on Alienation
Introduction to the Problem

1. Voluntary Alienation: beneficiary of a private express trust can voluntarily alienate his interest in property (transfer his right to future payments), and
2. Involuntary Alienation: creditors can involuntarily alienate a B's interest in property (atta

Restraints on Alienation
Spendthrift Trust: definition

The beneficiary can NOT transfer his right to future payments of income or principal and creditors can not attach the beneficiary's right to future payments of income or principal.

Restraints on Alienation
Spendthrift Trust: How to recognize on bar exam

Terms of the trust must essentially include the definition: "no beneficiary of this trust shall be allowed to voluntarily transfer his right to future payments, and no creditor shall be allowed to attach any b's right to future payments.

Restraints on Alienation
Spendthrift Trust: THREE TESTABLE ISSUES

1. Voluntary alienation
2. INVOLUNTARY ALIENATION
3. Settler creating spendthrift trust for himself

Restraints on Alienation
Spendthrift Trust: Voluntary Alienation

VOLUNTARY ALIENATION:
--gen rule: B can not voluntarily alienate or transfer his right to future payments.
--EXCEPT: Sometimes court will recognize the assignmetn on the groudn that the B merely has given the trustee a direction or order to pay the B's ag

Restraints on Alienation
Spendthrift Trust: Involuntary Alienation

INVOLUNTARY ALIENATION
--gen rule: creditors can't attach.
--EXCEPT (CL): preferred cred's can attach the B's right to future payments even w/ spendthrift. Key is that they are not typical creditors (ex: gvmnt creditors like I.R.S., those who provide nece

Restraints on Alienation
Spendthrift Trust: Self-settled spendthrift trust

Voluntary alienation: SPLIT OF AUTH
--MOST JXS: ignore provision restricting vol. ali. and allow the S to voluntarily alienate her interest.
--SOME JXs: WILL NOT allow S to transfer her right to future payments.
Involuntary alienation
--MAJ JXS: trust its

Restraints on Alienation
Support Trusts: Defintion

The trustee is required to use only so much of the income or principal as is necessary for the beneficiary's health, support, maintenance, or education.

Restraints on Alienation
Support Trusts: How to recognize it on EXAM

Terms of trust must include definition
"Trustee is required to use only so much of the income or principal as is necessary for the beneficiary's health, support, maintenance, and education.

Restraints on Alienation
Support Trusts: Three TESTABLE issues

1. Voluntary alienation: B can NOT transfer his right to future payments in a support trust.
2. Involuntary alienation: SAME rules as spendthrift trusts.
3. Self-settled support trust: SAME rules as spendthrift trust.

Restraints on Alienation
Discretionary Trusts: Defined

The trustee is given sole and absolute discretion in determining how much to pay the beneficiary, if anything, AND when to pay the beneficiary, if ever.

Restraints on Alienation
Discretionary Trusts: How to Recognize on EXAM

Terms of trust must include the definition
"Trustee shall have full, sole, and absolute discretion in determining when to pay the beneficiary and how much to pay the beneficiary.

Restraints on Alienation
Discretionary Trusts: Three TESTABLE issues

1. Voluntary Alienation
2. Involuntary Alienation
3. Self-settled discretionary trusts: Same rules as spendthrift trusts

Restraints on Alienation
Discretionary Trusts: Three TESTABLE issues: VOLUNTARY ALIENATION

TELL THE BAR EXAMINERS:
ON the one hand, NO: B can't because the q may be asked, what exactly is the beneficiary assigning. The beneficiary may not get anything.
ON the other hand, if there was an assignment then assignee steps into the shoes of the benef

Restraints on Alienation
Discretionary Trusts: Three TESTABLE issues: INVOLUNTARY ALIENATION

TELL THE BAR EXAMINERS:
ON the one hand, no bc there is nothing to attach. Trustee may never allocate anything to the B. B could not force payment, neither can creditors. So, nothing to attach by creditors.
ON the other hand, if trustee has notice of the

Restraints on Alienation
What if get this problem: "Trustee in his sole and absolute discretion, shall pay the amount needed for the beneficiary's support and maintenance" ?

SAY (**
EXAM
**):
Bc of the words "sole and absolute" it could be a discretionary trust. Then go through those rules.
THEN say bc of the words "support and maintenance" in the alternative it could be a support trust. Then go through those rules.

Resulting Trusts

1. Definition
2. How a resulting trust arises

Resulting Trusts
Definition

An implied in fact trust based on the presumed intent of the parties. If it is decreed by the court, the resulting trustee will transfer the property to the settlor if the settlor is alive, and if not, to the settlor's estate.

Resulting Trusts
How it arises?

SEVEN SITUATIONS:
1. PET ends by its own terms, no provision for what happens to corpus thereafter (i.e. S creates trust to enable her daughter to get law school education, ends when daughter gets it).
2. PET fails bc there is no beneficiary.
3. Charitabl

Resulting Trust
Purchase Money Resulting Trust

A pays consideration to B to have title to the property transferred to C.
1. If A and C are NOT closely related= rebuttable presumption that C is holding as a purchase money resulting trustee for the benefit of A.
2. If A and C ARE closely related= rebutt

Resulting Trust
Semi-Secret Trusts

Arises when the WILL (ALWAYS a will scenario) makes a gift to a person to hold as trustee, but does not name the beneficiary.
EX: "I devise $100K to Able as trustee"
1. To admit in the evidence to establish the terms of the trust violates the statute of w

CONSTRUCTIVE TRUSTS

1. Definition
2. How a Constructive Trust Arises
NOTE: THEY ALSO APPEAR as crossovers with remedies.

Constructive Trusts
Definition

-Not really a trust But, instead, is simply a remedy to prevent fraud or unjust enrichment.
-If court decrees it, wrongdoer has one obligation--to transfer the property to the intended B as determined by the court.

Constructive Trusts
How it Arises?

FOUR SITUATIONS:
1. Trustee of PET or a Ch. Trust makes a profit because of self-dealing.
--Trustee will have to turn those profits over to the intended beneficiaries of the trust as decreed by the court.
2. W/ law of wills, when there is fraud in the ind

Constructive Trusts
Secret Trusts in the Law of Wills

The will on its face makes a gift outright to A, but the gift is given on the basis of an oral promise by A to use the property for the benefit of B.
--Parol evidence is admissible to show that the beneficiary was B.
--A will not be allowed to keep proper

Constructive Trusts
Oral Real Estate Trusts

Example: S goes to A and states, "If I transfer Blackacre to you by deed, will you hold it for the benefit of B?" A agrees, then S executes a deed in favor of A and delivers it to A.
--from four corners of deed, A owns property in fee simple absolute, fre

Constructive Trusts
Oral Real Estate Trusts: Three situations where transferee not allowed to invoke S/F as affirmative defense?

1. A fiduciary relationship between S and A
2. There was fraud in the inducement on A's part
3. There was detrimental reliance By B.
--look for taking possession and making improvements. Possession alone isn't enough.

TRUSTEE POWERS AND DUTIES

1. Trustee Powers
2. Trustee Duties owed to the B and Remedies (**
HEAVILY TESTED
**)
3. Trustee duties owed to third persons

Trustee Powers and Duties
Trustee Powers

Trustee has all enumerated powers and implied powers.
--Implied powers: helpful and appropriate to carry out the trust purpose. EX:
1. Power to sell trust property
2. Power to incur expenses
3. Power to lease
4. Power to borrow (modernly, not under CL).

Trustee Powers and Duties
Trustee Duties Owed to Beneficiaries

1. Duty of Loyalty
2. Duty to Invest
3. Duty to Earmark
4. Duty to Segregate
5. Duty Not to Delegate
6. Duty to Account
7. Duty of Due Care

Trustee Powers and Duties
Trustee Duties Owed to Beneficiaries:
Duty of Loyalty

Rqrs that trustee administer the trust for the benefit of the beneficiaries (impliedly, trustee must be impartial), having no other consideration in mind. (NO SELF-DEALING by trustee)
Exs of Breach: preferring one beneficiary, his child, over others; sell

Trustee Powers and Duties
Trustee Duties Owed to Beneficiaries:
Duty to Invest

SPLIT OF AUTHORITY. THREE ALTERNATIVE RULES of the duty to invest. DISCUSS ALL THREE
1. State Lists
2. Common law prudent person test
3. Uniform Prudent Investor Act

Trustee Powers and Duties
Trustee Duties Owed to Beneficiaries:
Duty to Invest--> STATE LISTS

Some states have lists which trustee must follow in the absence of directions in the trust. Good investments in these JXs are:
1. Federal government bonds
2. Federally insured certificates of deposit.
3. First deeds of trust in real estate
4. Sometimes, s

Trustee Powers and Duties
Trustee Duties Owed to Beneficiaries:
Duty to Invest--> COMMON LAW prudent person TEST

Rqrs trustee to act as reasonably prudent person investing his own property, trying to maximize income while preserving corpus. If the trustee holds himself out as having greater skill, he is held to a higher standard.
--KEY: Each individual investment is

Trustee Powers and Duties
Trustee Duties Owed to Beneficiaries:
Duty to Invest--> Uniform Prudent Investor Act

adopted by MOST states: The act simply provides that the trustee must invest as a "prudent investor."
KEY: each individual investment is NOT scrutinized, but, rather, performance is measured in the context of the ENTIRE trust portfolio.
--SO any investmen

Trustee Powers and Duties
Trustee Duties Owed to Beneficiaries:
Duty to Invest--> MISCELLANEOUS RULES

1. Under ANY standard, trustee has a duty to diversity, so that if there is a loss, the entire portfolio is not wiped out.
2. NO SPECULATING allowed under common law prudent person test OR State Lists.
3. IF BREACH= Trustee must make good the loss. If the

Trustee Powers and Duties
Trustee Duties Owed to Beneficiaries:
Duty to Earmark

THIS requires the trustee to label trust property as trust property.
EX: If trustee owns share of stock and it is properly earmarked, the stock will be registered "John Smith, as trustee of ABC trust."
CONSEQUENCES OF BREACH:
-CL: If there is a loss, the

Trustee Powers and Duties
Trustee Duties Owed to Beneficiaries:
Duty to Segregate

The Trustee CANNOT comingle his own personal funds with trust funds.
--also requires that the trustee not co-mingle the funds of Trust A with the funds of Trust B.
CONSEQUENCE FOR BREACH:
--Trustee can be removed ad be held liable for any loss.

Trustee Powers and Duties
Trustee Duties Owed to Beneficiaries:
Duty Not to Delegate

The trustee can rely on professional advisors in reaching a decision, BUT the trustee cannot delegate decision-making authority to these advisors.
CL:
--A trustee could not delegate the duty to invest to a professional money manager.
--In the absence of a

Trustee Powers and Duties
Trustee Duties Owed to Beneficiaries:
Duty to Account

This requires the trustee, on a regular basis, to give the beneficiaries a statement of income and expenses of the trust.
CONSEQUENCE IF BREACH: the beneficiaries would file an action for an accounting.

Trustee Powers and Duties
Trustee Duties Owed to Beneficiaries:
Duty of Due Care

The trustee must act as a reasonably prudent person dealing with his own affairs.
EXAM: will almost always be able to discuss this duty when the trustee breaches his or her fiduciary duties on the bar exam.

Trustee Powers and Duties
Trustee Duties Owed to Beneficiaries:
REMEDIES of beneficiary for Breach of duty or duties

1. Damages
2. Constructive Trust Remedy
3. Tracing and equitable lien on property (see Remedies)
4. Ratify the transaction if good for beneficiary
5. Remove trustee

Trustee Powers and Duties
Trustee Duties Owed to Beneficiaries:
FINAL POINTS

1. Look for THREE or FOUR duties breached on bar exam, NEVER GET just one or two.
2. YOU WILL ALWAYS be able to discuss due care, so don't leave it out.
**
IMPORTANT
**

Trustee Powers and Duties
Liability of Trustee to Third Persons (in K and in Tort): Liability in K
COMMON LAW RULE

1. Trustee sued in his personal capacity, thus personal assets at stake BUT can get indemnification from trust assets IF the trustee acted within his or her powers and was NOT personally at fault.
2. ONLY TIME trustee would be sued in his representative c

Trustee Powers and Duties
Liability of Trustee to Third Persons (in K and in Tort): Liability in K
MODERN LAW RULE

1. If other person to K, promisee, knows that trustee is entering into the K in his rep capacity THEN trustee MUST be sued in his rep capacity (and personal assets therefore not at stake).
2. SO enough to sign "J, as trustee of ABC trust

Trustee Powers and Duties
Liability of Trustee to Third Persons (in K and in Tort): Liability in Tort
COMMON LAW RULE

1. Trustee is sued in his personal capacity.
2. If trustee was w/o personal fault, the trustee can get indemnification from trust assets. So, if an agent committed the negligent act, or if strict liability, then trustee can get indemnification.

Trustee Powers and Duties
Liability of Trustee to Third Persons (in K and in Tort): Liability in Tort
MODERN LAW RULE

1. The trustee is sued in his individual capacity and is personally liable for torts ONLY if the trustee is personally at fault (i.e. acted negligently or otherwise committed a tort).
--THUS if agent committed the negligent act or if this is a case of str

MODIFICATION AND TERMINATION OF TRUSTS

1. Modification by the settlor
2. Modification by the court
3. Termination of revocable trusts
4. Termination of irrevocable trusts

Modification and Termination of Trusts
Modification by the Settlor

Settlor can modify the trust if:
1. Settlor expressly reserves the power to modify the trust.
2. The settlor has the power to revoke
--bc power to revoke is greatest power settlor can have, so whenever has the power to revoke, settlor has, by implication,

Modification and Termination of Trusts
Modification by the Court

Can be modification by the court regarding:
1. Charitable trusts AND
2. The cy pres power
Can change mechanism to further settlor's general charitable intent.
CAN ALSO BE modification of charitable trusts or private express trusts regarding the court's DE

Modification and Termination of Trusts
Modification by the Court: Deviation Power

AKA Doctrine of Changed Circumstances
1. When the court exercises this power, it changes the administrative or management provisions of the trust.
2. W/ deviation, the court is NOT changing beneficiaries.
TWO ELEMENTS MUST BE ESTABLISHED:
1. Unforeseen ci

Modification and Termination of Trusts
Termination of Revocable Trusts: When does Settlor have the power to revoke?

MAJORITY RULE: To retain the power to revoke, the settlor must expressly reserve the power in the trust instrument.
MINORITY RULE: Settlor has the power to revoke, unless the trust is expressly made irrevocable.

Modification and Termination of Trusts
Termination of IRREVOCABLE trusts: How can they terminate before the time set for termination in the trust instrument?

THREE WAYS:
1. Settlor and all the beneficiaries AGREE to terminate.
2. All the beneficiaries agree to terminate and all the material purposes have been accomplished
3. By operation of law: passive trusts and the Statute of Uses

Modification and Termination of Trusts
Termination of IRREVOCABLE trusts: Settlor and all the beneficiaries AGREE to terminate

all the beneficiaries" means you must account for contingent remaindermen: guardian AD LITEM MSUT be appointed to represent them.
--Ad Litem=a guardian appointed to represent those parties to a suti who are incapacitated by infancy or otherwise.

Modification and Termination of Trusts
Termination of IRREVOCABLE trusts: All the beneficiaries AGREE to terminate and all material purposes have been accomplished

REASON: equity won't see a trust continue to carry out a minor or insignificant purpose.
--insignificant purposes that have yet to be accomplished: court will make certain that sufficient assets are set aside to accomplish these purposes.
--REMEMBER: acco

Modification and Termination of Trusts
Termination of IRREVOCABLE trusts: Operation of Law

Passive trusts and the STATUTE of USES:
--s/u comes into play when have PET w/ a corpus of real property, and the trust is PASSIVE (trustee has no active duties and is just holding bare legal title).
--Here, under s/u, the beneficiaries get legal title by

INCOME AND PRINCIPAL (UNIFORM PRINCIPAL AND INCOME ACT)

1. Income and expenses allocated to the life tenant.
2. Income and expenses allocated to the remainderman
3. Adjustment power of trustee

Income and Principal (Uniform Principal and Income Act)
Income and Expenses Allocated to the Life Tenant

Life Tenant gets the following income:
--Cash dividends
--Interest Income
--Net business income
Life Tenant's interest pays for the following expenses:
--Interest on loan indebtedness
--taxes
--minor repairs (e.g. paint job)

Income and Principal (Uniform Principal and Income Act)
Income and Expenses Allocated to the Remainderman

Remainderman gets the following income:
--Stock dividends
--Stock splits
--Net proceeds on the sale of a trust asset
Remainderman's interest pays for the following expenses:
--Principal part of loan indebtedness
--Major repairs or improvements (new wing o

Income and Principal (Uniform Principal and Income Act)
Adjustment Power of Trustee

1. Trustee can disregard the above stated rules regarding allocation of income to life tenant and remainderman if a different allocation is necessary to administer the trust fairly.
2. EX: If the only income from the trust is from the sale of trust assets