Law of Trusts New York Bar Exam Preparation Condensed Revision Notes

Law of Trusts New York Bar Exam Preparation Condensed Revision Notes

TRUST

  1. I) REQ. FOR TRUST
  2. Express Trust –ONLY REAL TRUST
  3. Resulting Trust – equit. remedy
  4. Constructive Trust – equit. remedy
  5. A) EXPRESS TRUST

1) – allows owner of prop. make transfers of prop. & have assets managed on behalf of someone

PERSON ->TRUST = SETTLOR; -> LEGAL TITLE to TRUSTEE to manage money & beneficiaries = EQUITABLE TITLE to distributions from trust

2) 2 KINDS:

  1. a) LIFETIME (inter vivos) – set up during lifetime by settlor (inter vivos trust)
  2. b) TESTAMENTARY – set up in settlor’s will

3) 8 REQ. VALID TRUST:

SETTLOR -> DELIVERY of legal title -> PROPERTY/res/corpus/principal -> TRUSTEE (holds legal title for benefit of BENEFICIARY with INTENT to create trust for LAWFUL PURPOSE in VALIDLY EXECUTED doc.

*NO CONSIDERATION TO CREATE TRUST

  1. B) EXPRESS TRUST REQ.:

1) SETTLOR = >18yo + CAPACITY TO ENTER CONTRACTS

2) DELIVERY = TITLED ASSETS FORMAL TRANSFER TO TRUSTEE

3) PROPERTY (RES) =

  1. a) ANYTHING, BUT SETTLOR MUST OWN, NOT EXPECT TO OWNERSHIP IN FUTURE
  2. b) MUST BE IDENTIFIED, NOT SUBJECT TO FUTURE DETERMINATION

4) TRUSTEE:

  1. a) LIFETIME (INTER VIVO) – ANYONE CAN BE TRUSTEE b/c no court involv. Needed
  2. b) TESTAMENTARY – UNDER COURT SUPERVISION -> anyone EXCEPT: <18; jud. dec. INCOMPETENT; CONVICTED FELONS; INCAPABLE B/C DRUNK, DISHONEST, WANT OF UNDERSTANDING, IMPROVIDENCE
  3. c) NON-RESIDENT “ALIEN” AS TRUSTEE ONLY IF NY RESIDENT AS CO-FIDUCIARY

*FAILURE TO NAME IN TRUSTEE= NO PROBLEM, COURT CAN APPOINT

5) BENEFICIARIES:

  1. a) MUST BE DEFINITE & ASCERTAINABLE + NO AMBIGUITY
  2. B) IF AMBIGUOUS = TRUSTEE HOLDS FOR RESIDUARY BENEFICIARY (e.g. to all my good friends; very best friend of all)
  3. c) EXCEPTION: BENEFICIARY AS FAMILY OR NEXT OF KIN = DEFINITE & ASCERTAINABLE = TRUST DOES NOT FAIL, CONSULT INTESTACY (e.g. “my family” = legal definition, intestacy statutes)

6) INTENT

  1. a) SETTLOR MUST INTEND CREATE ENFORCEABLE OBLIGATION, PRECATORY LANG. = NOT ENOUGH (e.g. “ I would like the trust” – not valid, precatory lang.)
  2. b) TRUSTEE GIVEN DUTIES TO PERFORM; NO DUTY= PASSIVE TRUST= NOT TRUST.

* DETERMINE INTENT – LOOK @ ALL LANG. & FACTS; MERE USE OF “TRUST” = NO SHOW OF INTENT (e. g. HYPO 8)

7) LAWFUL PURPOSE:

  1. a) CANNOT CALL FOR COMMISSION OF CRIME
  2. b) CANNOT DESTRUCTION OF PROPERTY
  3. c) CANNOT CONDITION AGAINST PUBLIC POLICY (against marriage / promotes divorce: “until she divorced her worthless husband”)

BUT IF NOT OFFENSIVE TO PUB. POLICY, THEN VALID (“until she remarries” = valid purpose, provide for widowhood). MARRIAGE RESTRICT. CERTAIN RELIGION/ETHNIC GROUP =VALID AS PERMISSIBLE PARTIAL RESTRAINTS ON MARRIAGE (“providing he marries a Jewish woman” -> still has wide choice).

8) TRUST EXECUTION FOR INTER VIVOS:

WRITING + SIGNED BY SETTLOR & TRUSTEE   AND  a) acknowl. by notary public OR b) signed 2 witnesses

  1. II) TYPES OF TRUSTS

ALL TRUSTS PRESUMED IRREVOCABLE, UNLESS EXPLICITLY AUTH. REVOCATION

  1. A) REVOCABLE LIFETIME/ INTER-VIVOS TRUSTS:

1) MAIN REQ: AT LEAST 1 BENEFICIARY NOT SETTLOR; SETTLOR CANNOT BE SOLE BENEF. WHEN SOLE TRUSTEE

2) SETTLOR CAN BE TRUSTEE; INCOME BENEFICIARY FOR LIFE; CAN BE BENEFICIARY IF 1+ OTHER BENEFICIARY; RETAIN POWER TO TERMINATE /AMEND.

3) REASONS FOR REVOC. LIFETIME TRUST:

  1. a) MANAGE ASSETS EFFICIENTLY, ESP. PROFESSIONAL TRUSTEE
  2. b) PLAN FOR INCAPACITY BY AVOIDING GUARDIANSHIP ROCEEDING
  3. c) AVOID PROBATE

4) REASON AGAINST:

  1. a) DOES NOT AVOID TAX
  2. b) IF SETTLOR KEEPS INCOME INTEREST/ POWER TO REVOKE = FULL TRUST ASSETS INCL. IN SETTLOR’S GROSS ESTATE FOR FEDERAL TAX
  3. B) “POUR-OVER” GIFTS:

1a) TESTAMENTARY GIFTS (IN WILL) TO EXISTING REVOC. TRUST ARE OK = CALLED POUR OVER GIFTS= AVOIDS WILL FORMALITIES IN TRUST.

  1. c) TRUST -> CHANGE -> OK DURING LIFETIME OF SETTLOR IF EASIER THAN CHANGING WILL
  2. d) REQ. FOR POUR-OVER: TRUST MUST BE IN EXISTENCE OR EXECUTED CONCURRENTLY W WILL

2) a) POUR-OVER NOT LIMITED TO TRUSTS BY SETTLOR, CAN BE TO ANY EXIST. TRUST + IF EXEC. BY OTHER PERSONS b) VALID EVEN IF TRUST WAS UNFUNDED/ PARTIALLY FUNDED DURING LIFETIME (STAT. EXCEPT. TO IDENTIFIABLE TRUST PROPERTY RULE)

3) LIFE INSURANCE (TYPE OF POUR-OVER) 2 WAYS:

  1. a) i) INSURED ->UNFUNDED REVOC. INSURANCE TRUST & NAME TRUSTEE OF TRUST AS POLICY BENEF. ii) TRUST -> TESTAMENTARY -> L. INSUR. CONTRACT NAME “THE TRUSTEE NAMED IN MY WILL” AS L. INSUR. BENEFICIARY
  2. b) PROCEEDS OF SAVING ACCOUNTS/ PENSION PLANS SAME AS L. INSUR. PROCEEDS

TOTTEN-TRUST:

1) BANK ACCOUNT IN DEPOSITOR’S NAME “AS TRUSTEE FOR” NAMED BENEFICIARY (e.g. Mary Smith as Trustee for John Smith).

  1. a) DEPOSITOR -> DEPOSITS & WITHDRAWALS AS HE WISHES DURING DEPOSITORS LIFETIME.
  2. b) BENEFICIARY = NO BENEFICIAL INTEREST DURING DEPOSITOR’S LIFETIME, BUT GETS ALL FROM ACCOUNT WHEN DEPOSITOR DIES.

2) OTHER ISSUES: NO PARTICULAR WORDS REQ. TO CREATE TOTTEN TRUST ACC. (“Joan Cohen ITF Rose Cohen” OK “ITF” ENOUGH)

3) REVOKE TOTTEN TRUST:

  1. a) WITHDRAW ALL MONEY ON DEPOSIT IN ACC
  2. b) EXPRESS REVOCATION DURING LIFETIME BY DEPOSITOR WRITING NAMING BENEF. & FINANCIAL INSTIT. & REVOC. NOTARISED & DELIVERED TO BANK

* IF MISSING ELEMENTS, ATTEMPT INVALID.

  1. c) REVOC. IN WILL MUST COMPLY WITH SAME REQ. FOR REVOC. DURING LIFETIME
  2. d) DEATH OF BENEF. =TOTTEN TRUST REVOKED & MONEY GOES FREE AND CLEAR TO DEPOSITOR

4) CHANGE OF BENEF. MUST BE BY DEPOSITOR. SAME WAY AS REVOC: NOTARISED STATEMENT SENT TO FINANC. INSTIT. NAMING OLD & NEW BENEF.

5) CREDITORS OF DEPOSITORS = CAN REACH TOTTEN BEFORE OR AFTER DEPOSITOR’S DEATH, SINCE TOTTEN IS REVOKED PARTIALLY EACH TIME WITHDRAWAL IS MADE (e.g. depositor= trustee for totten trust, creditors “too bad for beneficiary” -> reach all balance)

  1. D) JOINT BANK ACCOUNTS: trust-like alternative NOT TOTTEN TRUSTS

1) ISSUE: AFTER 1 PARTY DIES, CAN ANYONE BLOCK MONEY GOING TO OTHER PARTY

2) IF CLEAR & CONVINCING EVIDENCE NO INTENT FOR SURVIVORSHIP WHEN ACC. ESTABLISHED = ACC. OPENED AS CONVENIENCE TO DEPOSITOR, THEN SURVIVORSHIP LANG. CAN BE SET ASIDE - HARD TO SATISFY

3) EACH JOINT ACC. HOLDER OWNS 50% OF ACC., REGARDLESS OF DEPOSITOR, IF 1 PERSON MAKES ALL DEPOSIT = GIFT OF ½ TO OTHER HOLDER

  1. E) UNIFORM TRANSFERS TO MINORS ACT:

1) 3 REASONS TO MAKE GIFT UNDER UTMA

  1. a) AVOIDS GUARDIANSHIP PROCEEDINGS (TAKE COST + TIME)
  2. b) AVOIDS TRUST
  3. c) QUAL. FOR $14K PER DONEE ANNUAL EXCLUSION FED & STATE GIFT TAX

2) GIFTS UTMA MADE TO CUSTODIAN AND MUST SPECIFY MADE UNDER NY UTMA

3) UTMA OK IN WILL IF SAME REQ. STAT. LANGUAGE IS USED

4) DUTIES OF CUSTODIAN:

  1. a) HOLD, MANAGE, INVEST PROPERTY UNDER PRUDENT PERSON
  2. b) PAY OVER TO MINOR OR FOR MINOR’S NEEDS WHAT PROP. CUSTODIAN DEEMS ADVISABLE and
  3. c) PAY LEFTOVER TO MINOR WHEN 21 (post-Jan. 1, 1997 gift) OR 18 (pre-Jan. 1, 1997 gift)

* UTMA DOES NOT CREATE TRUST; SPECIAL STAT. CONSERVATORSHIP, CUSTODIAN= HOLDS NO LEGAL TITLE TO PROPERTY LIKE TRUST TRUSTEE (MINOR HOLDS THAT)

5) UTMA TAX CONSEQUENCES:

  1. a) IF DONOR NAMES SELF CUSTODIAN, AMOUNT OF GIFT INCLUDIBLE IN CUSTOD’S GROSS ESTATE FOR FEDE & STATE ESTATE TAX
  2. b) IF DONOR NAMES SOMEONE ELSE AS CUSTODIAN, AMOUNT OF GIFT IS NOT INCLUDIBLE
  3. F) CHARITABLE TRUSTS:

1) MUST HAVE INDEFINITE (UNLIKE PRIVATE TRUST) BENEFICIARIES & REASONABLY LARGE GROUP: CANNOT HAVE SPECIFIC, NAMED PERSONS AS BENEF. BUT TRUST FOR MASSES FOR RELATIVES IS OK (“ pay for the costs of Masses for the repose of souls of the testator, his deceased parents, and other relatives” –OK)

2) MUST BE FOR CHARITABLE PURPOSE  (HEALTH, EDUCATION, RELIGION etc)

3) MAY BE PERPETUAL (are not subject to the Rule Against Perpetuities (RAP) which indirectly limits duration of trust)

4) CY PRES CAN BE USED TO CHANGE TRUST: IF PURPOSE CAN NOT BE ACCOMPLISHED, OR DESIGN. CHAR. GOES OUT OF EXISTENCE, COURT MAY USE THIS TO MAKE NEAR AS POSSIBLE TO WHAT SETTLOR WANTED

5) ATTORNEY GENERAL = DUTY OF REPRESENTING BENEF. OF CHAR.TRUST IN STATE

  1. a) AG INDISPENSABLE PARTY TO ANY SUIT ON CONSTRUCTION OR ENFORCEMENT OF CHAR. TRUST
  2. b) AG & DONOR HAVE STANDING TO SUE TO ENFORCE TRUST’S TERMS
  3. G) NON-TRUSTS:

1) a) HONORARY TRUST: NO HUMAN IS BENEF. OF A PRIVATE TRUST (e.g. “to use trust income to take care of my beautiful rose garden” – not valid, falls into residuary of estate)

  1. b) PRIVATEV = MUST HUMAN BENEF.
  2. c) EXCEPT: ia) PET TRUST = CAN LAST FOR NO LONGER THAN PET’S LIFETIME
  3. ib) SOMEONE DESIGN. IN WILL OR APPOINT. BY COURT CAN ENFORCE TRUST & ENSURE PURPOSE CARRIED OUT
  4. ii) CEMETERY TRUST a) PERPETUAL CARE & MANTENANCE OF CEMETERIES & BURIAL PLOTS = CHARITABLE, OK W/O HUMAN BENEF.
  5. b) SINCE CHARITABLE = NO RAP PROBLEM

2) CONSTRUCTIVE TRUST: a) FLEXIBLE EQUIT. REMEDY TO DISGORGE UNJUST ENRICHMENT FROM WRONGFUL CONDUCT

  1. b) TRUSTEE’S ONLY DUTY TO CONVEY PROP. TO THE 1 WHO SHOULD HAVE IT IN EQUITY

E.G. Marjorie all property to brothers in will. Marjorie decides: change will for all prop. to go to Scouts & revoke old. Lawyer > informed brothers > turned up in office, tried to convince not to change. Marjorie > stroke > dies next day > new will not signed. Problem: all wills to be signed by Testator before 2 witnesses. Probate new will? – NO. not signed & witnessed. Old validly revoked? – NO, not signed, witnessed to be valid  + revocation. Brothers win as benef. of unrevoked old will? –NO, hold title on constructive trust & have duty to transfer title to the Scouts, b/c otherwise unjustly enriched by wrongful conduct.

Constructive trust in Intestacy:

Jack = 2 children; Ralph & Roberta; Ralph = 2 children, Mary & Marie. Ralph shoots Jack. Jack dies w/o will. Intestate: ½ Ralph; ½ Roberta. BUT Ralph = wrongful conduct, unjust enrich. Result: CONSTRUCTIVE TRUST imposed, property goes as if wrongdoer pre-deceased Jack. Ralph’s ½ goes to Mary & Marie.

3) RESULTING TRUST: a) EQUITABLE REMEDY b) PURCHASE MONEY RESULTING TRUST (PMRT) – NOT RECOGNISED IN NY. c) ONLY IF PURCHASER BUYS PROP. & PUTS TITLE IN SOMEONE’S NAME (NOT RELATIVE), THEN CLAIMS NO GIFT INTENDED + ASKS TITLE HOLDER FOR TITLE TO PROP. & TITLE HOLDER REFUSES TO GIVE UP. d) MOST STATES = PMRT (allows purchaser to compel title holder to give up title) NOT IN NY! BUT IF CLEAR & CONVINCING EVIDENCE THAT GRANTEE EXPRESSLY OR IMPLIEDLY PROMISED TO RECONVEY, THEN CONSTRUCTIVE TRUST CAN BE IMPOSED TO BENEFIT PURCHASER (e.g. Mary > title to friend. @ closing in lawyer’s office, friend promised to transfer title back whenever Mary demanded. Mary, Lawyer, Mother Theresa, Minik heard= NY, can get title back b/c clear & convincing evidence.)

  1. H) STATUTORY SPENDTHRIFT RULE AND PROTECTION FROM CREDITORS:

1) PROTECTS TRUST BENEF. INTEREST FROM CRED. BY PROHIBIT. VOLUNTARY/INVOLUNTARY TRANSFER OF BENEF’S INTEREST. 2) NY ALLOWS. NY> SPECIAL STAT. RULE, PROTECTS ALL INCOME INTERESTS IN TRUSTS WITH SPENDTHRIFT PROTECT. EVEN IF NO SPENDTHRIFT CLAUSE BUT ONLY APPLIES TO INCOME FROM TRUST, NOT PRINCIPAL. 3) SPENDTHRIFT TO REMAINDER BENEFICIARY (WHO GETS PRINCIPAL), SPEND. CLAUSE EXPLICITLY STATED IN TRUST (e.g. “to pay income for life to Jane, on Jane’s death principal to be transferred to Philip.” – Spend. Clause protects: Jane (income benef.) or Philip (remainder benef.) or both. In NY, income benef. gets one automatically.)4) TYPICAL SPEND. CLAUSE LANGUAGE: “NO BENEFICIARY OF THIS TRUST SHALL HAVE THE POWER TO ASSIGN HIS OR HER INTEREST, NOR SHALL SUCH INTEREST BE REACHABLE BY THE BENEFICIARY’S CREDITORS BY ATTACHMENT, GARNISHMENT, OR OTHER LEGAL PROCESS”. 5) EFFECT: KEEPS CREDITORS AT BAY 6) 5 EXCEPTIONS:

  1. a) CREDITORS FURNISH. NECESSITIES (food, clothing, shelter). b) CHILD SUPPORT & ALIMONY CREDITORS c) FEDERAL TAX LIENS (IRS) d) EXCESS INCOME NEEDED FOR SUPPORT & EDUCATION (i) last resort remedy > show all other remedies exhausted; ii) needed support based on lifestyle of benef.) e) 10% LEVY PROVIDED BY CPLR PARA. 5205 (E)

E.G. Party Patty> many debts. 4 creditors sued & gained judgements. Trust = subject to NY spend. Rule. Can creditors reach? – YES, can 10% levy even if sub. To spend. Clause. BUT: ALL CREDITORS SHARE 10% LEVY, NOT 10% PER CREDITOR.

7) SELF-SETTLED TRUST RULE: LIMITATION ON SPEND. CLAUSE a) SPREND. PROTECT. DOES NOT APPLY TO ANY INTEREST RETAINED BY SETTLOR. E.G. “trustee shall pay the income for life to Settlor Sammy”, 5 yrs later, Sammy alive, creditor obtained judgement against Sammy for $250K. Can creditor reach despite spendthrift? YES, b/c NO spend. Protect. To any interest retained by settlor. If Sammy > express spendthrift clause, interest still not protected. Principal protected since settlor is not remainder beneficiary. b) SETTLOR = CAN’T HIDE OUT FROM CREDITOR, BUT CAN PROTECT OTHER BENEF. c) IF SETTLOR HAS POWER TO REVOKE, CREDITOR HAS ACCESS TO THE TRUST.

III) MODIFICAGTION AND TERMINATION OF TRUST

A)TRUST MODIFICATION BY TRUSTEE &/ BENEFS

1) ONLY APPROPRIATE IF OBJECTIVES OF TRUST WOULD BE DEFEATED/ SUBSTAN. IMPAIRED IF TRUST NOT MODIFIED

2) PURPOSE OF TRUST COMES 1ST, OVERRIDING ANY SPECIF. DIRECTIONS = CLAFLIN DOCTRINE. E.G. John > trust to provide income for wife, children etc. Directed no to sell his principal trust asset, stock in newspaper. Over years > newspaper> no money, no income for benefs. Could trustee sell? YES, primary purpose to provide income, retention of stock incidental.

  1. B) TWO-LEVEL MODIFICATION TEST: 1) FIND OUT PRIMARY INTENT 2) LOOK @ DIRECTIONS TO DETERMINE IF THEY FRUSTRATE PURPOSE OF PRIMARY INTENT(B/C CHANGES IN CIRCUMSTANCES). IF SO, DIRECTIONS CAN BE CHANGED BY COURT. E.G. husband trust = mansion + never to be sold -> to wife, then to daughter. over years= heavy manufacturing area, large factory buildings except for settlor’s house. trustee > remove restriction & sell. can do? yes, primary purpose: house to wife + daughter, primary direction give mansion + changes in neighbourhood = house no longer suitable. 3) COURT CAN AUTH. INVASION OF PRINCIPAL IF NOT ENOUGH INCOME TO CARRY OUT SETTLOR’S PURPOSE. E.G. Husband -> income trust to wife, remainder to Roger. June > wants retirement home, money = not enough. June > petition to court to distribute principal to supplement her income. Court auth. Invasion? YES, by statute can auth. Distribution of principal to carry out settlor’s purpose.
  2. C) TRUST TERMINATION BY THE SETTLOR

1) TRUSTS HARD TO TERMINATE IN NY: IRREVOCABLE AND UNAMENDABLE UNLESS POWER TO REVOKE & AMEND EXPRESSLY RESERVED IN TRUST INSTRUMENT

2) EXCEPTION: SETTLOR CAN TERMINATE IF ALL BENEFS CONSENT; OFTEN IMPOSSIBLE B/C NO1 CAN GIVE CONSENT FOR MINORS OR MENTALLY INCOMPETENT BENEFS. E.G.  Nancy >irrevoc. Trust income to Nancy, then Oria, if not living, Oria’s 2 children (minors). Nancy wants to terminate, Oria agrees. Court llows? NO, no1 can consent for minors. If Oria= no children; but pregnant, YES, b/c child in gestation is not a person whose consent is required – 3) BENENFICIARIES MUST BE BORN ALIVE, IN TRUST TERMINATION CHILD IN GESTATION IS NOT A PERSON.

4) IF TRUST >PROPERTY TO HEIRS OR NEXT OF KIN, INTEREST IS NOT CONSIDERED A BENEFICIAL AND NO CONSENT NEEDED FROM THEM (AS THEY CAN’T BE ASCERTAINED UNTIL DECEDENT’S DEATH). E.G. Jim > irrevoc. Trust to Jim, then to Susan and then principal to Susan’s heirs. Can Jim terminate if Susan agrees? YES, heirs= not beneficial interest req. consent.

  1. IV) TRUST ADMINISTRATION
  2. A) TRUSTEE’S POWERS:

1) NY FIDUCIARY POWERS ACT (FPA) controls: POWERS CAN BE EXERCISED BY TRUSTEE W/O COURT ORDER & W/O EXPRESS AUTH. IN TRUST

2) FPA ALSO CONTROLS WHAT EXECUTOR/ADMINISTRATOR OF A DECEDENT’S ESTATE  CAN DO.

3) GENERAL APPROACH TO TRUSTEE’S POWERS IN NY: TRUSTEE CAN DO ALMOST ANYTHING W SOME EXCEPTIONS

  1. a) CAN DO: SELL REAL / PERSONAL PROP.; MORTGAGE PROP.; LEASE PROP.; MAKE ORDINARY REPAIRS; CONSTEST/COMPROMISE/SETTLE CLAIMS OR DO ALMOST ANYTHING TO MANAGE CORPUS OF TRUST
  2. b) CANNOT 3 THINGS: ENGAGE IN SELF-DEALING; BORROW MONEY ON BEHALF OF TRUST; CONTINUE BUSINESS IN TRUST PROP. TRUSTEE = LIABLE FOR LOSSES INCURR. BY BUSINESS UNLESS HAS COURT APPROVAL TO CONTINUE BUSINESS.
  3. B) SELF-DEALING:
  4. 5 PROHIBITIONS: a) TRUSTEE CANNOT BUY/SELL TRUST ASSETS TO HIMSELF (absolute rule!) e.g. Tommy Trustee wanted to buy stock held by trust> purchased @ $110, trading V $96. Prohibited transaction? YES, can’t buy/sell to himself; b) CANNOT BORROW FUNDS (absolute rule!) e.g. Trustee Ted > desperate need of money, borrowed $5K. Prohibited? YES, can’t borrow! c) CANNOT LEND MONEY TO TRUST – ABSOLUTE RULE, ANY INTEREST EARNED MUST BE RETURNED, ANY SECURITY GIVEN = INVALID. d) CANNOT PROFIT FROM SERVING AS TRUSTEE (EXCEPT FOR APPROPRIATE TRUSTEE FEES). CANNOT TAKE ADVANTAGE OF CONFIDENTIAL INFO RECEIVED WHILE TRUSTEE. e) CORPORATE TRUSTEE CANNOT BUY OWN STOCK AS TRUST INVESTMENT.
  5. 2 AFFIRMATIVE DUTIES ON SELF-DEALING: a) TO SEGREGATE TRUST ASSETS FROM PERSONAL ASSETS. REMEDY: IF COMMINGLED FUNDS TO BUY ASSET & ASSET GOES DOWN = CONCLUSIVE PRESUMPTION PERSONAL FUNDS USED. IF ASSET GOES UP, CONCL. PRESUMPTION TRUST FUNDS USED.
  6. b) TO EARMARK TRUST ASSETS BY TITLING IN TRUSTEE’S NAME AS A TRUSTEE OF PROPERTY.
  7. C) REMEDIES FOR BREACH OF FIDUCIARY RESPONSIBILITIES:

1) BENEFICIARY CAN SUE TO REMOVE TRUSTEE 2) BENEFIC. CAN RATIFY TRANSACTION & WAIVE BREACH. 3) BENEF. CAN SUE FOR ANY LOSS. ACTION TO RECOVER LOSS TO TRUST - SURCHANGE ACTION.

  1. D) NO FURTHER INQUIRY RULE: BRREACH OF FIDUC. DUTY BY SELF-DEALING = AUTOMATIC WRONG, NO FURTHER INQUIRY MADE. GOOD FAITH & REASONABLENESS = NOT DEFENSE.
  2. E) ACTIONS AGAINST 3RD PARTY WHEN TRUSTEE SELF-DEALING
  3. IF TRUSTEE SELF-DELAING & SELLS TO 3RD PARTY, BENEF. CAN’T SUE THE PURCHASER, IF THAT PURCHASER IS BONA FIDE PURCHASER (BFP) FOR VALUE W/O NOTICE.
  4. BFP LIABLE TO BENEF. IF PURCHASER KNEW THAT DEALING WITH TRUSTEE AND KNEW THAT TRUSTEE SELF-DEALING.
  5. F) INDIRECT SELF-DEALING: SELF-DEALING RULES APPLY TO LOANS & SALES TO RELATIVES OF TRUSTEE; BUSINESS WHERE TRUSTEE IS OFFICER; EMPLYEE; PARTNER; PRINCIPAL SHAREHOLDER.
  6. G) EXCULPATORY CLAUSES:
  7. CANNOT BE USED TO SHIELD TRUSTEE FOR LIABILITY FOR BREACH OF FID. DUTY IN TESTAMENTARY TRUST B/C RELIEVING EXECUTOR OR TEST. TRUSTEE FROM LIABILITY FOR NEGLIG. IS VOID AS AGAINST PUBLIC POLICY.
  8. BUT CAN BE USED IN LIFETIME TRUT
  9. V) LIABILITY OF TRUSTEE IN CONTRACT AND TORT
  10. A) PERSONAL LIABILITY OF TRUSTEE IN CONTRACT: 1a) IF SIGNED ONLY ON BEHALF OF TRUST= NO PERSONAL LIABILITY; b) IF SIGNED PERSONALLY & MERELY MENTIONED TRUST= PERSONAL LIABILITY. G. “Mary Jones, Trustee of the Jonathan Jones Trust” – Personal liability b/c just noted trust; “Jonathan Jones Trust, by Mary Jones, Trustee” – No personal liability, language shows contract with trust, not trustee; “Mary Jones, as Trustee of the Jonathan Jones Trust and not individually” – No personal liability, contract with trust.

2) EVEN IF PERSONAL LIABILITY= TRUSTEE REIMBURSEDBY TRUST IF :a) CONTRACT W/N POWERS OF TRUSTEE; AND b) TRUSTEE ACTING IN COURSE OF PROPER ADMINISTRATION OF TRUST.

  1. B) PERSONAL LIABILITY IN TORT: 1) TRUSTEE PERSONALLY LIABLE FOR ALL TORTS BY TRUSTEE/ TRUSTEE’S EMPLOYEES a) ABSOLUTE RULE, NO EXCEPTIONS b) TO DEAL W LIABLITY, TRUSTEE SHOULD BUY LIABILITY INSURANCE & CHARGE COST TO TRUST.

2) TRUSTEE CAN GET REIMBURSEMENT FOR ANY TORT CLAIMS IF a) TRUSTEE ACTING W/N TRUSTEE’S POWERS (when tort was committed); AND b) TRUSTEE NOT PERSONALLY AT FAULT

  1. C) TRUSTEE’S INVESTMENT POWER:

1) MUST MANAGE PROPERTY OF TRUST ON BEHALF OF BENEF. = INVESTMENT OF CORPUS OF TRUST

2) NY > UNIFORM PRUDENT INVESTOR ACT (UPIA): BROAD LATITUDE TO TRUSTEES TO CHOOSE INVESTMENTS

3) CAN PURSUE MODERN PORTFOLIO THEORY OF INVESTMENT= TRUSTEE CREATES CUSTOM-TAILORED INVEST. STRATEGY FOR THIS TRUST.

4) KEY FACTORS: a) TRUSTEE MUST CONSIDER ROLE OF EACH INVESTMENT W/N OVERALL TRUST PORTFOLIO. b) MUST CONSIDER EXPECTED TOTAL RETURN FROM INCOME & CAPITAL GAIN

5) DOES NOT HAVE TO JUSTIFY PRUDENCE OF EACH INVESTMENT BY ITSELF, CAN BALANCE OFF RISKY & SPECULATIVE AGAINST SAFE & CONSERVATIVE

6) SPECIFIC THINGS: a) PRUDENCE NOT MEASURED BY HINDSIGHT; LOOK @ DECISION TO INVEST WHEN MADE, NOT LATER; TRUSTEE DOES NOT HAVE TO HAVE CRYSTAL BALL. b) TRUSTEE CAN EXERCISE ADJUSTMENT POWER & ALLOCATE CAPITAL GAINS TO INCOME i) can switch capital gains into income category if necessary & vice versa to protect income benef. ii) End goal= fairness to all benefs.

7) Key to UPIA= FLEXIBILITY TO SHAPE INVESTMENT STRATEGY FOR MAX TOTAL RETURN + FLEXIBILITY TO ADJUST INCOME B/W INCOME & REMAINDER BENEFS TO BE FAIR ON EACH.

  1. VI) RULE AGAINST PERPETUITIES (RAP)
  2. A) QUICK PROP. LAW REVIEW:
  3. NO INTEREST VALID IF COULD VEST LATER THAN ANY LIFE IN BEING (LIB) @ TIME OF CREATION OF INTEREST + 21 YEARS.
  4. a) INTEREST VESTED = NO CONDITION TO BE SATISFIED, EXACT IDENTITY OF TAKER UNKNOWN. b) IF POSSIBILITY THAT INTEREST COULD VEST LATER THAN LIB +21 = VOID
  5. NY HAS PERPETUITIES REFORM STATUTE= AUTOMATICALLY REDUCES ALL AGE CONTINGENCIES TO 21 YEARS, THUS SAVING THE GIFT.

e.g. blackacre to son for life, remainder to 1st of son’s children to reach 30. does gift to 1st of son’s children to reach 30 violate rap? MBE: yes, b/c vesting could take longer than LIB +21; NY: NO, b/c NY RAP reform statute, which automatically reduces age contingencies to 21.

  1. B) RAP & TRUST

E.G. income to grandson for life and then principal to any child of Ronald who reaches 30. Income interest of Ronald violate RAP? No b/c vested NOW. Principal interst in a child of Ronald who reaches 30 violate RAP? Common law: Yes, could take longer than LIB +21, NY: No, b/c reform rule reduces age on contingency to 21 yrs, the language of trust should be modified to “to any child of Ronald who reaches 21”.

  1. C) NY RULE AGAINST SUSPENSION OF POWER OF ALIENATION: 1) ANY INTEREST VOID IF SUSPENDS POWER OF ALIENATION FOR PERIOD LONGER THAN LIB+21 > WHEN NO PERSONS WHO COULD, TOGETHER, TRANSFER FEE SIMPLE TITLE.

2) SUSPENSION OF ALIENTAION WHEN EITHER: a) SPENDTHRIFT INCOME INTERESTS ARE IN TRUST (considerable given NY’s automatic spend. protection when trust is silent about income alienation) OR b) LIFE ESTATE CREATED IN AN UNBORN BENEF., OR IN OPEN CLASS THAT MAY INCLUDE UNBORN PERSONS

e.g. to A and his heirs so long as no liquor consumed on premises, if ever consumed then to B and her heirs. Suspension rule violated ? NO, b/c A & B together could transfer a fee simple w/n their lifetimes + 21 yrs. Gift to B violate RAP? Yes, b/c vesting in B’s interest might take place beyond the RAP period of As + Bs lifetimes +21 yrs.

e.g. Judith > income to sister Jane for life > Jane’s death = income to Jane’s children for their respective lives, then remainder to Bob. @ Judith’s death Jane = 30yrs old, has 1 child. Is rap violated? No, b/c Jane’s kid’s vesting = when Jane dies (in RAP period); Is suspension Rule violated? Yes, b/c upon creation of trust Jane could not join the other benefs to transfer a fee simple absolute, since the class gift includes potential unborn children who cannot presently in their unborn state consent to join transfer of a fee simple absolute( and who will not have a life in being to validate duration of their spendthrift income interest). Result: income interest in Jane’s children is VOID and remainder will go to bob immediately upon Jane’s death which is when her own income interest terminates.

     
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