Introduction to Trusts

Report
(Re)Introduction to trusts
 Inter vivos revocable trusts to avoid delays, costs
and publicity of probate
 Testamentary marital trusts to save on estate
taxes and protect children from prior marriage
 Trusts for disabled children
 Trusts for minors
 Discretionary trusts to reduce taxes on family
wealth, shield beneficiaries from creditors, allow
for accommodation to future circumstances
1
Statistics and sources of law
Statistics
$760 billion held in ~1.25
million private and charitable
trust accounts (2006)
 More than 2 billion tax
returns reporting (2007):
$142.5 billion in gross
income
$3.7 billion in fiduciary fees
$1.6 billion in attorneys fees

Sources of Law



Restatements of Trusts
 First (1935)
 Second (1959)
 Third (2003, 2007, in prog)
Leading Multivolume Treatises
 Scott; Bogert
Uniform Laws
 Uniform Trust Code (2000)
2
Uniform Trust Code adoptions
(2009)
WA
MT
ME
ND
VT
MN
OR
NH
ID
WI
SD
NY
WY
RI
CT
MI
PA
IA
NE
NV
OH
IL
UT
MD
WV
CA
MO
VA
KY
OK
NM
WV also has
adopted
NC
TN
AZ
NJ
DE
IN
CO
KS
MA
AR
SC
MS
AL
GA
TX
LA
FL
AK
HI
3
The settlor, trustee,
and beneficiaries, p. 547
Trust Property
Settlor
Promise to manage property
in best interests of Beneficiaries
Trustee
Beneficiaries
4
Third-party rights
as trustee
Trustee
individual
Creditors
of the
Trust
Creditors
of the
Individual
5
Trust creation
 We’ve already seen that it’s simpler to create a
trust than to execute a will—no need to satisfy the
attestation and witnessing requirements of wills
 We’ve also seen that trusts require settlors,
trustees and beneficiaries (with individuals being
able to serve multiple roles for a single trust)
 Today, we discuss in more detail some of the
requirements for creating a trust
6
Requirements for creating
a trust




Settlor’s intent to create a trust
Presence of a res (the trust property)
Designation of beneficiaries
A writing or clear and convincing evidence
of an oral trust
 Indiana requires a writing for all trusts, and all
states require a writing for testamentary trusts
7
Lux v. Lux
Lux v. Lux
288 A.2d 701 (R.I.
1972), p. 557
2.
3.
4.
All the rest…of my estate…I give to my
grandchildren, share and share alike.
Any real estate…shall be maintained for the
benefit of said grandchildren and shall not be
sold until the youngest of said grandchildren
has reached twenty-one years of age.
Should it become necessary to sell any of
said real estate to pay my debts…it is my
express desire that said real estate be sold
to a member of my family.
Did Philomena “intend[] that her real estate be held in
trust for the benefit of her grandchildren”?
8
Lux and settlor intent
 Did it matter that Ms. Lux did not say she
was creating a trust?
 No
 Did it matter that Ms. Lux did not appoint a
trustee?
 No—”a trust never fails for lack of a trustee” (the
executor became trustee)
9
Lux and settlor intent
 Which facts indicated intent to create a trust?
 She did not give her grandchildren outright
ownership of the property
 The property had to remain unsold until the youngest
grandchild reached age 21
 The property was to “be maintained for the benefit” of
the grandchildren
 Note the major contrast with wills
 With wills, form matters a whole lot
 With trusts, courts look to function
10
Jimenez v. Lee
Jimenez v. Lee
547 P.2d 126 (Ore. 1976), p. 558
Mrs. Diercks makes $500 gifts to all
three children, deposited in an
account in names of children and Lee.
$1000
1945
Plaintiff sues, seeking
to recover proceeds
or original gifts.
1960
1956
Mr. Lee
Paternal grandmother
purchases $1000 bond for
plaintiff, registered in names of
plaintiff and plaintiff’s parents.
Plaintiff
$500
Lee cashes bond and closes
bank account, purchasing
stock with proceeds as
“custodian” for his children.
Mrs.
Diercks
11
What facts suggested that a
trust was created?
 The court found a trust because (p. 559)
 Lee’s own testimony and other evidence demonstrated
that the $1,500 in gifts were given for the educational
needs of his daughter
 In a letter, Lee acknowledged that he held the funds “in
trust” for the children (and Lee was a lawyer)
 Moreover, a trust—and not a custodianship—is the
relationship traditionally created by a gift imposing
fiduciary duties upon an adult for benefit of a
minor. If a custodianship is intended instead, the
donor should specifically say so.
12
Why did Lee claim he was a
custodian, not a trustee?
 As a custodian he could use the property for the
“benefit” of the minor; as a trustee, he could use it
only for education purposes
 Because he did not kept clear records, he was better off
if he was not restricted in use of the funds
 As a custodian, he would escape liability because
the statute of limitations would have run
 If he was a custodian, the statute of limitations on his
duty to account elapsed two years after Betsy reached
majority, or in 1968. If he was a trustee, the statute of
limitations did not begin to run until he accounted (which
13
he had never done).
Why did the daughter sue Lee?
 There was not a lot of money at stake—
perhaps something over $2,000 in the end
 How would the lawsuit affect Lee when he
wrote his will?
 Maybe their relationship was irreparably
frayed
14
Demonstrating intent
 I, JOHN DOE, of Indianapolis, Indiana, declare
myself trustee of the "______ DECLARATION OF
TRUST," consisting of the property identified on
the attached Schedule of Property, which property
and all additions, investments, and accretions shall
be administered upon the following terms:
 If your client wants a “precatory trust” (page 562),
then the language also should be clear: “I wish,
but do not legally require, that C permit D to live
on the land.”
15
Outright gifts
 To complete an outright gift, rather than a gift in
trust, there generally must be a delivery and
acceptance of the gift
 Actual delivery
 Constructive delivery (e.g., a key to a house so the
donee can pick up the painting given as a gift)
 Symbolic delivery (e.g., a writing such as the letter in
Speelman)
16
Requirements for creating
a trust




Settlor’s intent to create a trust
Presence of a res (the trust property)
Designation of beneficiaries
A writing or clear and convincing evidence
of an oral trust
 Indiana requires a writing for all trusts, and all
states require a writing for testamentary trusts
17
Creation of a trust:
Necessity of trust property
 A trust is not valid without a trust property
or res
 It need not be a sizeable amount of property,
it need not be a present interest, and it need
not be an interest that is certain to vest at
some point
 Even though the property requirement is not a
substantial one, it can still result in the failure
of an intended trust, as some of our cases for
today demonstrate
18
Establishing a res

“Settlor herewith deposits the sum
of One Dollar ($1.00) as the initial
corpus of the trust”
19
Unthank v. Rippstein,
Unthank v. Rippstein
386 S.W.2d 134 (Tex. 1964), p. 569
20
Why didn’t Craft create a valid
trust?

Did he designate a beneficiary?


Did he demonstrate intent to create a trust?



Yes. Iva Rippstein
Actually, he demonstrated intent to create a will when he
stated that he was binding his estate to make the monthly
payments—and Texas allows holographic wills
The court should have found a valid holographic will
(certainly more like a will than Kuralt’s letter)
Did he identify any trust property?

Only by implication, which the court concluded was not
sufficient. As a result, the court found an unenforceable
21
promise
Brainard v. Commissioner
Brainard v.
Commissioner
91 F.2d 880 (7th Cir. 1937), p. 572
Brainard orally declares
trust of expected profits
from stock trading in 1928
for benefit of wife, mother,
and minor children.
Dec. 1927
Stock trading is
profitable. Brainard pays
himself $10,000 as
trustee and distributes
profits among trust
beneficiaries.
Beneficiaries
declare trust
income on 1928
income tax return
1928
1929
Did trust arise in 1927, with Brainard’s oral
declaration, prior to making the profits?
No, according to the court, since the profits did not come into existence
until they were earned. But why aren’t future profits a res?
22
Can future profits be a res?

The Brainard court was obviously worried about
making it too easy for someone to evade taxes.
After all, we have an oral declaration, and Brainard
traded under his own name.

Of course, what constitutes a trust for most purposes
may differ from what constitutes a trust for tax purposes.
Recall that the creation of a revocable inter vivos trust
provides a number of advantages, but does not reduce
tax obligations (page 439). See the note on page 576 for
further discussion.
23
Speelman v. Pascal,
Speelman v.
Pascal
178 N.E.2d 723 (N.Y. 1961), p. 572
Pascal acquires exclusive
rights to produce musical
and film based on Shaw’s
“Pygmalion.” License to
expire in 1956.
1952
Pascal makes various attempts
to produce show.
Pascal promises, in writing, a
portion of the profits of the
(still unproduced) show to Miss
Kingman (aka Miss Speelman).
Feb. 22, 1954
Pascal dies.
July 1954
“Did the delivery of this paper
constitute a valid, complete, present
gift to [Speelman]…?”
24
Can future profits be a res?

Technically, the issue in Speelman is whether we
have a valid gift rather than a trust, but the same
question arises—is there a property right being
transferred?

Yes, we have the assignment by Pascal to Speelman of
an enforceable right of Pascal to future sums. According
to the court, there was “nothing left for Pascal to do in
order to make an irrevocable transfer to plaintiff of part
of Pascal’s right to receive royalties from the productions.
. .” (page 575, end of opinion).
25
Can future profits be a res?

What in the letter (page 573) suggests that
Pascal had not transferred his right to Speelman?

The second paragraph of the letter which states that
Pascal’s lawyer will confirm the arrangement “in a legal
form.”
26
Note 1, page 575

Brainard involved the oral testimony of interested
witnesses to establish a trust that avoided taxes


An oral declaration of trust is permissible, but the possibility of
fraud leads courts to apply other requirements strictly
What about the fact that Pascal had a contract that
entitled him to future profits while Brainard was promising
profits from the sale of stocks that he might not even
have owned at the time?

This view is supported by the Restatement provision cited in the
note, but note also that the Field case cited on page 575 by the
Speelman court did not involve an existing contract
27
Note 2, pages 575-76
a) Looks like Brainard. We have a gratuitous promise. No gift
because there was no delivery of a gift or written
instrument. No trust because O did not declare a trust and
no res.
b) This counts as a trust. The stocks that O already owns
constitute the res. This is how we make Brainard’s trust
look like it has a res.

If Brainard declared himself trustee of stock which he already
owned and stipulated that the dividends would go to him while
the other beneficiaries would receive the capital gains, the
practical effect is the same as a trust of the future profits in stock
trading, but the stock would provide a corpus (Restatement
(Third) of Trusts, § 41, comment b).
28
Note 2, pages 575-76
c) Looks like Brainard, but now we have a notarized writing.
On the other hand, still no res. If we follow the logic of
Brainard, no valid trust. If we think Brainard was driven
by the fact of an oral declaration with interested
witnesses, then maybe this case comes out differently.
d) We have an invalid trust, per Brainard.
29
Requirements for creating
a trust




Settlor’s intent to create a trust
Presence of a res (the trust property)
Designation of beneficiaries
A writing or clear and convincing evidence
of an oral trust
 Indiana requires a writing for all trusts, and all
states require a writing for testamentary trusts
30
The requirement of trust
beneficiaries
 A trust must have one or more ascertainable
beneficiaries—if we can’t identify the
beneficiaries, the trust will fail—there must be
someone to whom the trust owes fiduciary duties
and who can call the trustee to account


Charitable trusts need not have ascertainable
beneficiaries
Trusts for one’s descendants may have currently
unascertainable beneficiaries when the trusts are
created
31
Clark v. Campbell
Clark v.
Campbell
133 A. 166 (N.H. 1926), p. 579
Testator
Trustees
Friends
I therefore give and bequeath to my
trustees all my property embraced
within the classification aforesaid in
trust to make disposal by the way of
a memento from myself, of such
articles to such of my friends as they,
my trustees, shall select.
Must “the bequest for the benefit of the
testator’s ‘friends’…fail for the want of
certainty of the beneficiaries”?
Yes. One can designate relatives, or subsets
thereof, but not “friends.”
32
Indefinite beneficiaries

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.


Uniform Trust Code § 402(c), Ind. Code § 30-4-2-1(f)
But outside UTC states, the drafting lesson is not to
create a power in a trustee to appoint among an
indefinite group. Give the power to the selector
individually, rather than as a trustee (note 1, p.581)
33
The will of Marilyn Monroe,
p. 582
1) Did Monroe intend to create a trust?
The words “it being my desire” are precatory words, and she said “give
and bequeath” so no trust, and Strasberg takes as a devisee. (But some
courts would say the words demonstrate intent to create a trust,
especially since the executor is the contingent taker.)
2) If Monroe intended a trust, did she designate an ascertainable beneficiary?
No ascertainable beneficiaries, so trust fails, and personal effects go to the
34
residue of the estate.
The rest of the story

Strasberg never distributed any of Monroe’s
personal effects to the friends or colleagues to
whom Marilyn was devoted


In fact, he requested the return of several of Marilyn’s
possessions that she had given to a colleague
When Strasberg died, he left a will granting
Marilyn’s personal effects to his wife, who, like her
husband, chose not to give any of Marilyn’s
personal effects to friends or colleagues of Marilyn
35
In re Searight’s Estate,
In re Searight’s
Estate
95 N.E.2d 779 (Ohio App. 1950), p. 582
George
Searight
“$1000 to be
used…to pay
Florence…for the
keep and care of
my dog as long
as it shall live.”
Executor/Trustee
“I give and
bequeath my
dog, Trixie…”
Florence
Hand
36
Can a dog be a beneficiary
of a trust?


We know from Russell (page 359), that you can’t
leave property in a will to a dog
Would it have been a problem if George had created
a trust for the benefit of dogs in general?


No, he could have created a charitable trust for dogs
(page 583, top)
The problem here is that George designated a
particular dog, so we have a private trust, and we
don’t have a beneficiary who can enforce the terms
of the trust
37
Can a dog be a beneficiary
of a trust?

The court permitted the bequest, treating it, like
other courts, as an “honorary trust” (page 583)


Such trusts are valid as long as the “trustee” is willing to
carry out the terms of the bequest (hence the term
honorary). (The court also said that it could be called a
gift with a power (page 583).)
Note that while Trixie was not in a position to
enforce the trust, the residuary beneficiaries of the
will have some ability to do so since they can seek
reversion of the trust if the trustee neglects the
responsibilities of the trust.
38
Trusts for noncharitable
purposes, p. 586
Honorary Trust
Transferee is not obligated
to carry out settlor’s purpose
 If transferee declines, she
holds the property on
resulting trust and property
reverts to settlor or settlor’s
successors
 Used in Searight’s Estate

Statutory Purpose Trust
Statutory trust for pet animal
or other noncharitable purpose
 Authorized by UTC §§408409 and UPC §2-907
 Typically authorize court to
reduce excessive trust property
and provide for enforcement
by settlor or court appointee

Ind. Code § 30-4-2-18
39
Requirements for creating
a trust




Settlor’s intent to create a trust
Presence of a res (the trust property)
Designation of beneficiaries
A writing or clear and convincing evidence
of an oral trust
 Indiana requires a writing for all trusts, and all
states require a writing for testamentary trusts
40
Requirement for a writing

Generally, a writing is not required, except
for testamentary trusts or trusts of land


Clear and convincing evidence required to
validate oral trust
But in Indiana, “a trust in either real or
personal property is enforceable only if there
is written evidence of its terms bearing the
signature of the settlor or the settlor's
authorized agent.”

Ind. Code §30-4-2-1(a)
41
Estate of Fournier
Estate of
Fournier
(Slide 1)
902 A.2d 852 (Me. 2006), p. 589
Faustina
Fogarty
Juanita
Flanigan
Rose
??
??
Curtis
King
George
Fournier
$400,000 in trust
for Fogarty
Josephat
Madore
Yvette
Madore
42
Estate of Fournier,
Estate of
Fournier
(Slide 2)
902 A.2d 852 (Me. 2006) (2)
Fournier asks Madores to
hold $400,000 in secret,
to be delivered upon his
death to Fogarty because
she “needed it more”
than his other sister.
Note discovered with instructions
Fournier dies testate. that $400,000 be divided among
Fogarty, Flanigan and King. Court
Residue in equal
holds oral trust was for benefit of
shares to Fogarty,
all three residuary takers.
Flanigan, and King.
2002
1998 or 1999
Fournier tells Flanigan
of arrangement with
Madores.
2005
Fournier gives
Fogarty a gift
of $100,000.
Madores give $400,000 to
Fogarty. Court finds oral trust
of money for her benefit.
43
Fournier


Note that the probate court weighed the conflicting
testimony and found no trust, while the supreme
court resolved the inconsistency in favor of a trust
Why did the supreme court override the probate
court?


Maybe because Flanigan had an incentive to
misremember/mislead while the Madores did not
In the end, the trust’s beneficiaries turned out to
the same as the will’s beneficiaries. Why did
Fournier bother with the trust?

Trying to evade taxes?
44
Olliffe v. Wells
Olliffe v. Wells
130 Mass. 221 (1881), p. 593
Semisecret Trust
Desire to create trust
appears on the face of
the will
 Terms are undisclosed
 Extrinsic evidence not
needed to prevent unjust
enrichment
 Devise is unenforceable

Secret Trust
Devise is absolute on
the face of the will
 Extrinsic evidence
necessary to prevent
unjust enrichment
 Court will impose a
constructive trust on
promisor

But Restatement would treat semisecret trusts like secret trusts
45

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