Trusts Outline

Undue Influence p. 418-44

• Defined – mental, moral or physical exertion which has destroyed the free agency of a testator by preventing the testator from following the dictates of his own mind and will and accepting instead the domination of and influence of another.

• Rationale for not enforcing – will reflects effort of a benny to substitute his own wishes for those of a testator susceptible to the benny’s influence

• Very difficult to overcome capacity and prove undue influence!

• Haynes v. First National State Bank of NJ – A confidential relationship creates a strong presumption of undue influence

• Facts: T had a TON of $$$ and 2 daughters, Haynes (D1) and Cotsworth (D2), each who had children of their own. D1 and her two sons lived with T after her husband’s death. D1’s sons moved away, but D1 continued to live with her mother until D1’s death. T then moved in with D2. During T’s lifetime she executed many wills and codicils that were prepared by a long time family attorney, Stevens.

• After moving in with D2, T executed a will with D2’s family attorney, Buttermore, leaving most of her estate to D2 and only 10k D1’s kids. D1’s sons sought to set aside the will on grounds of undue influence arising from the confidential relationship between T and D2, the chief beneficiary.

• Holding: Usually the contestant has the burden of proving undue influence BUT can shift to benny if the benny has:

• Relationship of trust and confidence
• AND suspicious activity

• Creates a rebuttable presumption of undue influence; benny’s job to rebut

• Court determined that the BOP shifted to the benny of the will to show that no undue influence existed (they failed): 

• Confidential relationship existed between T & D2
• T was old and dependent on D2’s care
• Attorney who drafted T’s will was also the D2’s attorney
• When T met w/ D2’s attorney, devises drastically changed from previous wills

• Will of Moses – A weak or infirm mind is more susceptible to undue influence

• Facts: Decedent was married 3x. She was a cougar and became friends with an attorney 15 yrs younger. Decedent referred to him as her boyfriend, and believed he was going to marry her. Decedent was an alcoholic, had heart disease, and breast cancer.  This relationship continued for several years until decedent died. Before she died, decedent made a will devising almost all of her property to bf. A different attorney drafted the will with no connection to decedent’s bf. Decedent’s closest relative was her older sister, who attacked will b/c of undue influence.
• Holding: (Majority)

• Special relationship:

• BF visited daily & was decedent’s attorney

• Weakened mental state:

• Elderly, seriously ill, and alcoholic
• Suckered by BF’s attention and charm

• Suspicious Circumstances:

• Will was changed from benefitting sister to BF

• Dissent: Facts don’t warrant a presumption of undue influence 

• Presumption was rebutted by clear and convincing evidence of good faith, full knowledge, and independent counsel 

• Chang Note:  case would probs come out different today and bf would win 

• Scenarios Where Courts Heavily Scrutinize to See if There Was Undue Influence 

• Lawyer is a benny (almost always invalidated) – especially if lawyer helped draft will
• Gifts to religious orgs, even if the spiritual advisor does not benefit personally
• Nursing home operators
• Nurses and caregivers 

Trusts

Introduction (p. 481 – 484)

• General

• Trust – entity in which ownership is divided between the trustee and the bennys
• Trustee – holds legal title to trust, right to manage the trust, and obligation to manage trust in benny’s best interest
• Beneficiary (AKA benny) – holds beneficial title to the trust property
• Settlor – the person who establishes the trust

• Why Establish a Trust?

• Bennys can’t manage the property (age, incapacity, or irresponsibility)
• Insulate property from claims brought by creditors
• Avoid probate and tax issues
• Maintain control over the property after the death of the testator

• Trusts > Life Estates
• Uniform Trust Code (UTC) – clarifies common law

Creation p. 484 - 495

• UTC §402 (p. 487) REQUIREMENTS FOR CREATION.

• (a) A trust is created only if:

• (1) the settlor has capacity to create a trust;
• (2) the settlor indicates an intention to create the trust;
• (3) the trust has a definite beneficiary or is:

• (A) a charitable trust;
• (B) a trust for the care of an animal, as provided in Section 408; or
• (C) a trust for a non-charitable purpose, as provided in Section 409;

• (4) the trustee has duties to perform; and
• (5) the same person is not the sole trustee and sole beneficiary.

• (b) A beneficiary is definite if the beneficiary can be ascertained now or in the future, subject to any applicable rule against perpetuities.
• (c) A power in a trustee to select a beneficiary from an indefinite class is valid. If the power is not exercised within a reasonable time, the power fails and the property subject to the power passes to the persons who would have taken the property had the power not been conferred.
• Gotta have (1) BENNYS (2) TRUST PROPERTY

• Generally – no trust fails for want of a trustee
• When there is no trustee b/c the trust never named one, death, resign, etc. – a court will appoint a trustee to ensure continuation of the trust

• Merger Doctrine – The same person may not serve as the sole trustee and sole benny b/c then legal title and equitable titles merge terminating trust.  UTC §402(a)(5)
• Passive Trusts – Imposes no active duties on the trustee, the trust is invalid and the beneficiary obtains both legal and equitable title
• Trustees –

• Manage and distribute property exercising due care
• Non-waivable duty to act in good faith, in the best interests of the bennys, and in accordance with the settlor’s objectives 
• Many states require a trustee to give notice to bennys of the existence of a trust, the identity of the trustee, the nature of the bennys’ interests, and their right to receive info about trust management

• Bennys –

• Trust doesn’t work w/o benny.

• Purpose of a trust is to benefit someone.

• Identifiable Bennys - modern trend is flexibility when met w/ testator’s clear intent

• RULE - it is enough that testator use language which is sufficiently clear to enable the court by extrinsic evidence to identify benny

• Unidentifiable Bennys - nebulous class (e.g. “my friends) generally invalid

• Restatement on Trusts

• Trustee has the power, but not the duty, to make distribution to the unclear beneficiaries 
• Who enforces? – Restatement doesn’t specify 

• UTC § 409

• Trustee has the duty to make distributions to the unclear beneficiaries Example: cemetery plot
• Who enforces? – Attorney General

• HYPOS

1. T’s will bequeaths $500k to trustee who must “pay the interest annually to [T’s] nieces and nephews.” Are there identifiable beneficiaries?

1. Yes
2. Arg. for no: more nieces and nephews could be born to T’s siblings 

1. Restatement says: implicit power designated to trustee to determine who some of the after-born class members might be

1. T makes a trust to benefit his “friends.” Are there identifiable beneficiaries?

1. No

• Trust Property

• Generally – a trust will fail w/o trust property; no trust property = no trust
• LAW: any current or future property interest, even if held in contingency, can be held in trust 

• If court determines that the subject of the trust is a mere expectancy rather than property, the trust is invalid.

• Brainard v. Commissioner: invalidated a trust created for any profits he might receive as a result of trading stock in the upcoming year.

• The interest hadn’t come into existence yet 
• Purpose for the trust: avoiding taxes

• Speelman v. Pascal: upheld an assignment for a % of profits to derive from a musical which had not been created 

• Theatrical producer had a right to produce the play, and assigned those rights to his lover – those rights were valuable 
• Purpose: he was trying to gift something to his lover

• Trust Formation

• Capacity

• Testamentary trust – same capacity as a will
• Revocable inter vivos trust – same capacity as a will
• Irrevocable inter vivos trust – looked at like a gift (testamentary capacity + knowledge of effect gift may have upon settlor’s finances and dependents)

• Intent

• Intent may be in question w/ precatory words (request or entreaty)

• Creates confusion as to obligatory intent that trustee carry out specific duties

• In determining whether precatory or a command, courts focus on:

• The relationship between the settlor and the trustee, and
• The specificity of the language in the trust instrument

• Spicer v. Wright – A trust requires an intent to impose a legal obligation 

• FACTS: Leila Spicer’s will named her sister as executor, and left her estate to her sister to be disposed of as agreed upon between the two of them.
• HOLDING: Trust will be created only if there is intent to impose a legal obligation on the trustee to make a particular disposition of property. If there was the intent to create a trust, but the terms of the trust are too indefinite, the trust will fail, and a naked trust will be implied in favor of the heirs at law.

• Precatory words directed at an executor are construed to create a trust, but no trust is created by precatory language directed to a legatee unless there is testamentary intent to impose a legal obligation upon him to make a particular disposition.

• Levin v. Fisch – words of request may be read as mandatory

• FACTS:  The will of Levin’s mother stated that it was her “desire” that Levin pay Fisch (aunt) $2,400 per year out of the income from property left to Levin.
• HOLDING: Words in a will that express the T’s wishes will be construed as mandatory if the will as a whole and the surrounding circumstances show that the testator intended the words to be mandatory. The more specific a disposition (i.e. a dollar amount is specified), the more likely it is that a court will find a trust

• Evidence court considered:

• Fisch was in poor health and unable to work full-time 
• Testator had paid her $200/year before T’s death 
• Testator gave Fisch gifts 

Support and Discretionary Trusts p. 506-523

• Using Trusts as an Estate Planning Tool

• Providing for Minor Children

• Well drafted will should contain 2 key provisions:

• Nominate a guardian to assume primary care of minors
• Will should create a testamentary trust for the children's benefit

• Building Flexibility into the Estate Plan: Support Trusts and Discretionary Trusts

• For settlors who want to give trustees discretion to deal with changing circumstances they can create a support trust

• Support trust - imposes a mandatory duty on the trustee to pay as much income and/or principal to a particular beneficiary as necessary to provide for that beneficiary's support

• Trust instrument may authorize payment for "support and education" or "health, support, and maintenance," etc.

• Trustee has some degree of discretion, but still MANDATORY to support beneficiary

• Trust that gives the trustee complete discretion over distributions is a discretionary trust.

• Discretionary trust - trustee has no mandatory obligation to distribute trust assets to a particular beneficiary.

• Essentially is settlor saying " I trust you, trustee, to do what is best for the described beneficiaries, and to make the payments I would believe appropriate."

• Settlor may create a hybrid that gives trustee discretion, but also articulates standards to guide the trustee in the exercise of discretion - called a discretionary support trust OR discretionary trust w/ standards 

• Wells v. Sanford – trust assets are assumed to be immediately available

• FACTS: Hiram’s will left property in trust to support his mother while she was living, and once she passed the rest of the estate would go to Sanford, the mother’s guardian.  The mother had her own assets, and Sanford wanted to use other property for her support first so he could keep Hiram’s estate to himself.
• HOLDING: Trust assets could be used to support the mother before her own assets were depleted.

• Support trusts, absent language indicating an intent to withhold assets, can be used to support the benny regardless of the benny’s own assets

• Note: Had this been a purely discretionary trust, the trustee could have refused to deplete trust assets and required that the beneficiary’s assets be used first

• Marsman v. Nasca – trustees must familiarize themselves with the financial condition of beneficiaries

• FACTS: Testator created a testamentary trust for maintenance, comfort and support of her husband (Cappy) which stated: “It is my desire that my husband be provided with reasonable maintenance, comfort, and support after my death…pay the net income to my husband at least quarterly throughout his life…my trustee shall, if they deem it necessary or desirable from time to time, in their sole and uncontrolled discretion, pay over to him . . . amounts of the principal thereof as they shall deem advisable for his comfortable support and maintenance.” For approx 10yrs, the trustee never inquired into the benny’s financial state and only paid him $300. 
• HOLDING: Support trusts impose a duty on the trustee to inquire into the financial state of the beneficiary to ascertain his needs. 

• Even if the trustee has the discretion to make such payments as he or she deems advisable, the discretion is not unbridled. The standard to be used is prudence and reasonableness. The duty of inquiry follows from the requirement that a trustee’s power be exercised with sound judgment.

• Dunkley v. Peoples Bank & Trust Co (discretionary support trust): trust provided that trustee should distribute, to testator’s husband, the net income (even to the extent of exhausting the principal) that “the trustee believes desirable for the health, support in reasonable comfort, education, best interests, and welfare” of testator’s husband. After testator’s death, the husband wanted a lot of principal. Husband finally found a trustee, Cooper, who authorized distribution of most of the trust principal for a house in Chicago (for “medical reasons” aka to be near his family). The trustee knew at the time that the husband had another house with a value of $110k and that trust proceeds of $122k (from a different trust) had just been distributed to him.

• HOLDING: the trustee bank had breached its fiduciary duties to the remaindermen; the entire bank, not just Cooper, is responsible.

Protecting Beneficiaries from Creditors (p. 524-30)

• Wilcox v. Gentry – creditors may garnish trust payments

• FACTS: Creditor wanted to collect on judgment against beneficiary for fraud on sale of property. TC said payments paid directly to Gentry subject to garnishment, but not those made on her behalf.
• HOLDING: Unless there is a restraint on alienation (what can be paid), any payments from a trust may be attached by creditors.

• There is no reason to distinguish between payments directly to a beneficiary and payments on behalf of the beneficiary.

• Allowing such a rule would only encourage circumvention of the right to attach payments.

• Trustee has discretion

• A beneficiary may not compel a trustee in a discretionary trust to make payments; likewise, a creditor may not compel payments because they "stand in the shoes" of beneficiary

Spendthrift Trusts (p. 530 - 40)

• A trust that prohibits the beneficiary’s interest from being assigned and also prevents a creditor from attaching that interest.

• Prohibits creditors from reaching the trust

• Spendthrift provisions are valid only if they prevent both voluntary and involuntary garnishment by the beneficiary's creditors
• Scheffel v. Kruegger – property in a spendthrift trust is not available to creditors

• FACTS: Defendant sexually assaulted Plaintiff's daughter.  He was ordered to pay for tort damages. Plaintiff tried to attach to trust, notwithstanding spendthrift clause. Trial court held the spendthrift clause enforceable.
• HOLDING: The statute that authorizes spendthrift trusts creates an absolute prohibition against attaching the property in those trusts. The trust created for defendant meets all of the qualifications of a spendthrift trust, and creditors therefore cannot take the property.

• There is no exception in the statute for tort claims.
• Plaintiff tried to argue that purpose of trust has failed. Nope. Trust still available after he’s released from jail.

• Public Policy Exceptions

• UTC 503 Exceptions to Spendthrift Provisions

• Spendthrift trust may be attached to pay child support, alimony, claims for admin of the trust (e.g. lawyer fees), and claims of the state and fed govt. 

• Claims for “necessaries”

• Some states also allow a landlord or physician to collect from a trustee

• Other limits

• Some states permit “excess” income to be sought after by creditors (i.e. income that exceeds bennys needs for education and support)

• Will not impose on the beneficiary's “station in life”

• Remainder interests - spendthrift provisions may/may not protect them
• Bankruptcy Claims - spendthrift prohibit bankruptcy estate from attaching

Creditors’ Rights in Self-Settled Trusts; Asset Protection Trusts (p. 540 – 50)

• UTC 505(a) Creditor’s Claim Against Settlor; notwithstanding a spendthrift provision

• Revocable trust - property is subject to creditors’ claims during settlor’s lifetime

• At death, property that was revocable is subject to claims of creditors, costs of administration, funeral costs, etc.

• Irrevocable trust - creditor may reach max amount that can be distributed for settlor’s benefit

• More than one settlor, amount of interest that belongs to the settlor in accordance with their contribution

• Settlor/benny cannot use a trust to circumvent settlor’s creditors

• If trustee has discretion to distribute entire income and principal, creditor will be put in same position as if trust not created

• Federal Trade Commission v. Affordable Media – self-funded spendthrift trusts may be fraudulent transfers

• FACTS: Andersons involved in ponzi scheme. They had an offshore account where they were co-trustees and “protectors.” Trust had a “duress” provision.

• DC issued preliminary injunction requiring Andersons to bring back $$$. Andersons said they couldn’t.  Held in contempt – appealed.
• Anderson taken off as co-trustee in accordance with duress provision.

• HOLDING: Contempt upheld. Burden to show inability to repatriate on Andersons.  Didn’t do it.  Trust was set up for that very purpose. Andersons were protectors of the trust and had access to the $$$.

Charitable Trusts p. 583-607

• Enforcement: the state’s AG enforces trust obligations

• AG has enforcement due to the public interest in charitable trusts
• When the settlor creates a charitable trust, bennys have standing to challenge potential uses of charitable trust funds 

• UTC §405: 

• Reverses the well-settled common law to provide that the settlor of a charitable trust may enforce its terms 

• Duration: charitable trusts can endure forever
• Tax incentives for charitable giving

• 100% deduction for gifts to qualifying charities
• Testators can postpone the date of a gift until after the lifetime of a spouse

• Trust: 100% marital deduction for the life interest in the spouse + 100% charitable deduction for the remainder

• Shenandoah Valley National Bank of Winchester v. Taylor – charitable ≠ benevolent

• FACTS: Henry left the residue of his estate to a trust that distributed money to all the children who attended a certain school, and his heirs claimed the trust was not a valid charitable trust.
• HOLDING:  The testator’s intent was merely benevolent, not charitable. Must be for the benefit of an indefinite number of people and have a charitable purpose.

• With re: to the clause saying $ should be used for educational purposes – there is no way to ensure this, it’s given to children to use as they please
• With re: to the argument that it creates a desirable social effect – given to all kids, regardless of need/poverty, thus it is kind but is not charitable 

• Examples of charitable purposes:

• Relief of poverty
• Advancement of education
• Advancement of religion
• Promotion of health
• Governmental or municipal purposes
• Other purposes the accomplishment of which is beneficial to the community 

• Charitable purposes are generally upheld, even if they are a little odd. Court uses a litmus test of “is this too weird?”

• Cy Pres Doctrine: The equitable doctrine under which a court reforms a written instrument with a gift to charity as closely to the donor’s intention as possible, so that the gift does not fail. Courts use Cy Pres especially in construing charitable gifts when the donor’s original charitable purpose cannot be fulfilled. UTC 413.

• Estate of Crawshaw – courts will modify charitable trusts to meet the purposes of the donor

• FACTS: Crawshaw left most of his residuary estate to a scholarship fund at Marymount College, but that college ceased to exist. If for some reason Marymount couldn’t accept/administer the trust, the will provided that the bequest go “to the official Board or Association of said college having the legal capacity to accept and administer the herein created trust.” Crawshaw had no affiliation with Marymount college – he wasn’t an alumni or professor. 
• HOLDING: Cy Pres Doctrine applied to save the testamentary gift 

• Cy Pres Doctrine requires:

• Gift to a charitable org for a charitable purpose
• Settlor manifest a general charitable intent; and 
• Listed beneficiary be unable to take the gift (bc it is impossible, illegal, or impracticable)

• What suggests general charitable intent? 

• Absence of a gift-over provision
• No specific ties (i.e. if you are an alumni this suggests a specific charitable intent)
• The bulk of the estate was bequeathed to charity 

• What weighs against Cy Pres application?

• Testator made an alternate disposition of the property if the charitable gift should fail or if testator manifests a specific charitable intent

Revocable Inter Vivos Trusts p. 689; 692-703

• Inter vivos – made during the lifetime of the settlor

• Typically, the settlor makes herself trustee and lifetime beneficiary 
• Most estate plans that employ revocable living trusts also use pour over wills 

• Pour over wills – directs court to distribute testator’s probate assets to successor trustee of living trust, to be managed according to trust’s terms

• Why are revocable inter vivos trusts > irrevocable inter vivos trusts for avoiding probate?

• Irrevocable forever prevent the settlor from changing her mind – used for gifts
• Revocable are made when the goal is to avoid probate 

• No Contest Clauses

• Settlors can insert no contest clauses in revocable trust instruments
• Problem: in the absence of careful drafting, it is unclear whether raising issues in probate court can trigger the trust’s no contest provision 

• Clymer v. Mayo – unfunded trusts mentioned in a will are valid 

• FACTS: Mayo executed a will where the bulk of her estate was to pour over into a revocable trust. She named her husband as the benny of the revocable trust. She designated the trustees as the beneficiaries of her life insurance policy and her pension. After Mayo and her husband divorced, she changed the benny of her life insurance. However she left the trustees bennys of her pension and her husband was the main benny of the trust. Mayo consolidated all of her property into her revocable trust. The trust was unfunded during her life. The issue was whether the unfunded trust was valid.
• HOLDING: Trust was valid under the state statute. 

• Trust that receives property from a will is valid even though the trust was unfunded during the settlor’s lifetime if the residuary clause of the will (1) identified the trust and (2) the terms of the trust were set out in a written instrument executed contemporaneously with the will (statute said this)

• Chang: Most states have passed statutes validating will provisions which pour assets into inter vivos trusts

• Advantages of Revocable Trusts

• Cost of probate is less (bc the size of the probate estate is smaller)
• The trustee can immediately distribute assets to decedent’s dependents
• Individuals that own real property other states – can avoid the costs of ancillary probate by transferring title for all property to a revocable trust 
• Privacy – trustee need not divulge contents of the trust document to any 3rd party
• Settlor can provide for a successor trustee in the event of settlor’s incapacity 
• Limits – in litigation, trustee will probably have to produce the trust document

• Standing to sue for revocable living trusts 

• Remainder bennys of revocable trusts don’t have standing during settlor’s life
• Challenges after settlor’s death can be difficult to win – if the settlor funded the trust while alive and lived in accordance with the trust’s terms, it’s solid evidence of intent to have the trust instrument dictate the distribution of her assets at death

• Protecting the Spouse Against Revocable Living Trusts

• When the settlor’s spouse challenges trust as illusory bc the settlor retained full control over the trust’s assets until the moment of death, the spouse often wins 
• UPC: revocable living trust is included in the “augmented estate” or will otherwise be available to satisfy the surviving spouse’s claim.