* Trusts * 

​

​

1. ** Private Express Trust  

   1. Definition: A fiduciary relationship as to property where one person, the trustee, holds legal title for the benefit of another, the beneficiary, who holds equitable interest (i.e., an interest in or right over property, which gives the holder the right to acquire formal legal title), which arises out of present manifestation of intent to create the trust for legal purpose that is not against public policy

      1. Note that trust could be revocable or irrevocable and it is presumed to be irrevocable unless otherwise stated **

   2. ​Elements of Private Express Trust ​

      1. Trust Res ( = Trust Property)

         1. ​Property must exist and be definite or definitely ascertainable at the time the trust is created and throughout its existence. (e.g., stocks, bonds, deeds, patents, copyrights, trademarks) 

      2. Trustee  

         1. A person or a firm that holds and administers property or assets for the benefit of a third party​​​​

            1. In the process of creating a trust, the court will not allow the trust to fail just because there is no trustee. When necessary, the court will appoint a trustee

            2. And in this case, until the trustee is appointed, the settlor or the estate of the settlor will hold legal title **

      3. Beneficiary

         1.  Any person who has the legal capacity to take, hold, and administer property for his or her own use can take, hold, and administer property in trust 

      4. Intention of the Settlor

         1. The settlor (i.e., the entity that establishes a trust) must intend to impose enforceable duties on a trustee to deal with the property for the beneficiary. Intent can be demonstrated by words, conduct, or both ** 

         2. It is immaterial whether the word 'trust' is used in the trust document. Yet, if the settlor uses words that express merely the desire or wish to do something, it may create a moral obligation, but they do not create a legal one. Additionally, intent to create a trust in the future is legally ineffective 

         3. And when a settlor does not immediately designate the beneficiary, the trustee, or the trust res, a trust is not created until the designations are made ** 

      5. Valid Trust Purpose: The trust must have a specific purpose and may not further illegal activity​

         1. In case of Illegality at the creation of the trust: The court will try to excise the illicit condition. Namely, the court will try to remove the illegal text in the trust. If that does not work, the court will either (i) invalidate the trust at its inception (i.e., the settlor will keep), or (ii) allow the trustee to keep the trust (in case the settlor himself or herself has committed illegality) 

         2. In case of Illegality after the creation of the trust: The trust will end as a Resulting Trust (i.e., whenever a person has created an express trust, but the express trust fails or does not completely dispose of the trust property, the property goes back to the settlor by operation of law) (i.e., the settlor or the estate of settlor will keep) **

   3. Types of Private Express Trust ​  

      1. Testamentary Trusts: A trust created when an individual dies and the trust is detailed in their last will

      2. Inter Vivos Trusts: A trust created for the purpose of estate planning while an individual is still alive (i.e., will substitute) **

         1. Transfer in Trust 

            1. Real Property – settlor must execute and deliver a deed transferring title to the trustee

            2. Personal Property – the property must be delivered to the trustee at the time settlor manifests the intent to create the trust 

               1. If there is no delivery, there is no trust

         2. Declaration in Trust – Settlor declares himself or herself as the trustee

            1. Real Property – there must be a writing

            2. Personal Property –  the settlor himself or herself is the trustee thus there is no issue of delivery

               1. look into the present manifestation of trust intent by the settlor **

2. Charitable Trust 

   1. Definition: Trust for a charitable purpose that benefits a large number of unidentifiable beneficiaries (In creating a charitable trust, there must be a certain charitable purpose which benefits the public) 

   2. Charitable Purpose: Relief of poverty, advancement of religion, advancement of education, helping the poor, helping the sick, furthering scientific research, furthering environment and art, community development, etc. **

   3. If the charitable purpose of the settlor is uncertain, impracticable or illegal, the court will apply the doctrine of cy pres

      1. Cy pres allows a court to select an alternative charitable purpose that satisfies the general charitable intent of the settlor **

         1. If the court finds that the settlor had a specific charitable intent in creating the charitable trust, the property goes back to settlor

            1. To determine whether the settlor had a general charitable intent or a specific charitable intent – the party could introduce both intrinsic evidence (i.e., trust instrument itself) and extrinsic evidence (i.e., any evidence derived from outside the will or trust agreement itself, that is, any evidence that are not related to the will or trust agreement itself) **

​

   3. Miscellaneous Trusts

1. Honorary Trusts

   1. Definition: Not a valid trust because it is merely a trust that carries out the wish of the settlor

   2. Rule: The trustee is not required to carry out the goal of the settlor. Thus, If the trustee refuses to carry out the wish of the settlor, the trust fails

   3. Example) Provide funds for the care of graves, the building of a monument, or the care of a pet

   4. Rule Against Perpetuities (see Real Property) – Because there is no measuring life under Honorary Trust, the trust always violate RAP. Thus, many courts will strike the trust at its inception and as a consequence there will be a resulting trust (i.e.,whenever a person has created an express intentional trust, but the express trust fails or does not completely dispose of the trust property, the undisposed property goes back to the settlor in a resulting trust), while other courts will allow the trust to endure for 21 years and then a resulting trust follows to end the trust **

2. Totten Trust

   1. Definition: A tentative bank account trust for the named beneficiary, whereby the named beneficiary takes whatever it is left in the account of the grantor 

   2. Rule: No fiduciary duty between grantor / beneficiary

   3. Example) A bank account is titled in the form “Grantor, in trust for Beneficiary” 

   4. Revocation: A totten trust will be revoked when:

      1. the beneficiary withdrawal of all money from the bank account;

      2. there is an express revocation in writing made during the lifetime of the grantor; or

      3. the beneficiary dies **

   5. Exception: However, if a grantor informs the beneficiary using any words other than “Grantor, in trust for Beneficiary”, such as “This trust is for you”, a totten trust can become a private express trust (see above) 

3. ​Spendthrift Trust

   1. ​Generally, a beneficiary of Private Express Trust can voluntarily alienate (i.e., transfer) his or her interest in property, and creditors can involuntarily alienate the interest in property of the beneficiary

   2. Terms

      1. ​Voluntary Alienation: Transfer or sell his or her property or right voluntarily 

      2. Involuntary Alienation: Transfer or sell his or her property or right by law without the consent of him or her  **

   3. Rule of Spendthrift Trust

      1. This type of trust is created by placing a restraint upon the beneficiary and his or her creditors which the full authority is given to an independent trustee

      2. That is, under Spendthrift Trusts, beneficiary cannot voluntarily alienate (i.e., cannot transfer his or her right to future payments of income or principal (i.e., a sum of money lent or invested, on which interest is paid), and creditors cannot involuntarily alienate (i.e., cannot attach the right of the beneficiary to future payment of income or principal)

      3. The purpose of this trust is to protect the beneficiary from his or her improvidence **

      4. Exception to Involuntarily Alienation under Spendthrift Trusts

         1. Preferred Creditors Exception – Preferred creditors (i.e., IRS, provider of necessities, child support, spousal support, alimony, tort judgment creditors) can attach the right of beneficiary to future payments, because under this exception, the creditors have the same rights as the beneficiary 

4. Support Trusts 

   1. Rule: Support trust is a trust where the trustee is to provide for to support and maintain the health and education of the beneficiary. A support trust can be a mandatory trust or a discretionary trust

      1. Mandatory Trust: A mandatory trust gives the trustee no discretion, thus the trustee must distribute its income or principal according to a schedule set by the trust document. A mandatory trust usually has a limited lifetime, because the trustee must distribute income and principal according to a set formula **

      2. Discretionary Trust: A discretionary trust gives the trustee discretion to pay income or principal to the beneficiaries. Although the discretion is limited by the guidelines of the trust document and the fiduciary duty to the beneficiaries, it would be the duty of the settlor to choose a trustee that they can trust completely for the sake of the beneficiary 

​

   4. Implied Trusts

1. Resulting Trusts

   1. Rule: Based on the presumed intent of the parties, if a resulting trust 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 heirs of the settlor **

   2. A resulting trust can arise in the following situations:

      1. when a private express trust (see above) ends by its own terms and there is no provision for what happens thereafter

      2. when private express trust fails, because there is no beneficiary or becomes illegal

      3. when charitable trust (see above) ends because of impossibility/impracticability and cy pres (see above) can’t be used to modify the trust **

      4. when the resulting trust is a purchase money resulting trust (i.e., A trust that is created when a person purchases property, but instructs the seller to transfer the property or title to a different person. This type of trust generally arises as a matter of course when an item of property is purchased using the money of another person) 

      5. when there is an excess corpus (i.e., excessively enough money to achieve his or her dream) in a private express trust 

      6. when the trust is a semi-secret trust (i.e., the will makes a gift to a person to hold as trustee, yet does not name the beneficiary) **

2. Constructive Trusts

   1. Rule: It is not an actual trust but a remedy to prevent fraud or unjust enrichment. That is, in order to prevent fraud or unjust enrichment, the trustee (i.e., wrongdoer) who is holding the property on behalf of the intended benefiacry, must transfer the property to the intended party as determined by the court **

   2. When do the Constructive Trusts arise

      1. When trustee of a trust makes a profit because of self-dealing (i.e., an illegal activity that occurs when a person or entity with fiduciary duty puts his or her own interests ahead of the interests of other person) **

      2. When there is “fraud in the inducement” (see “Wills”), or “undue influence” (see “Wills) 

      3. When the trust is a secret trust (i.e., a secret trust is a trust where property is left to a trustee for the benefit of beneficiaries who are not named in the will. There are two types of secret trusts (i) fully secret trusts, and (ii) half secret trusts. In fully secret trusts, the will is totally silent as to the existence of a trust, and in half secret trusts the will provides that the beneficiary is to hold the property on trust, but does not specify the terms of the trust or the identity of the beneficiary) **

      4. Verbal Real Estate Trust

         1. This is a secret trust for real property 

            1. The trust will be invalid if the party claims the Statute of Fraud claim (i.e., a requirement that certain kinds of contracts must be in writing. And real estate contract/trust always must be in writing. Here the trust is a verbal real estate trust, thus it violates the Statute of Fraud because it is not a written real estate trust), unless **

               1. Fiduciary relationship exists between the settlor and the trustee,

               2. There was a fraud in the inducement, and 

               3. There was a detrimental reliance by the intended beneficiary **

​

 5. Trust Modification

1. Trust Modification by the Settlor 

   1. The settlor can modify the trust, if the settlor expressly reserves the power to modify the trust 

   2. The settlor also has the power to modify if the settlor has the power to revoke the trust **

2. Trust Modification by the Court

   1. The trust can be modified by the court regarding charitable trust (see above) and cy pres (see above)

   2. The trust can be modified by the court under the ‘Deviation Power’

      1. Definition of Deviation Power: A power that is given to the court to change the administrative or management provisions of the trust

      2. Factors of Deviation Power

         1. For the court to use the Deviation Power on behalf of the settlor:

            1. there must be unforeseen circumstances on the part of the settlor, and 

            2. there is a necessity to preserve the trust **

3. Termination of Revocable Trusts & Irrevocable Trusts

   1. Definition

      1. Revocable Trusts: A trust whereby provisions can be altered or canceled dependent on the grantor

      2. Irrevocable Trusts: A trust where its terms cannot be modified, amended or terminated without the permission of the named beneficiary 

   2.  Rule

      1. The power of termination depends on whether the trust is revocable or irrevocable **  

         1. Termination of Revocable Trust

            1. Revocable trust can be terminated if the settlor considers to expressly reserve the power to terminate in the trust

         2. Termination of Irrevocable Trust **​

            1. Irrevocable trust can be terminated if:

               1. the settlor and all beneficiaries agree to terminate while the settlor is alive;

               2. all beneficiaries agree to terminate the irrevocable trust and, at the same time, the termination will not frustrate the chief purpose of the settlor;

               3. there is an operation of law (i.e., under a relevant statute, the beneficiary gets the legal title which is the end stage of a trust, and the trust terminates); or  

               4. there is currently an unforeseen changed circumstance that would defeat the chief purpose of the trust (i.e., in this case, the court may terminate the trust upon petition by the trustee or beneficiary) **

​

 6. Power & Duty of Trustee

1. Power of the Trustee

   1. Definition: Trustee has all enumerated powers (i.e., this will be explained in details later soon) that is written in the trust, and all implied powers that are helpful and appropriate to carry out the purpose of the trust 

   2. Example of implied powers of trustee) Power to sell trust property, power to incur expenses, power to lease, and power to borrow **

2. Duty of the Trustee to the Beneficiary

   1. Fiduciary Duty

      1. Definition of Fiduciary Duty: The relationship between parties that has a duty to act in the interest of the other

      2. Types of Fiduciary Duty of the Trustee to the Beneficiary 

         1. Duty of Loyalty

            1. Rule

               1. Trustee has a fiduciary duty to administer the trust in the interest of the beneficiary, having no other consideration in mind

               2. If the trustee breaches the duty of loyalty, the trustee could be personally liable to the trustee **

            2. Remedy

               1. In case where the trustee has breached his or her fiduciary duty to the beneficiary, the beneficiary can:

                  1. recover loss caused by the breach, or

                  2. receive profits made by the trustee **

         2. Duty to Earmark

            1. Definition of Earmark: Designate a property for a specific use 

            2. Rule

               1. Trustee must label trust property as trust property. That is, a trustee must distinguish the trust property from his or her property in the deed (i.e., a signed legal document that grants its holder specific rights to an asset)

                  1. Example) If X receives a house to hold in trust for L, X must write down the name L not his or her name in the deed 

               2. Trustee will be personally liable if any loss incurred was caused by failure to earmark on the part of the trustee ** 

         3. Duty not to Delegate 

            1. Rule

               1. Trustee may not delegate the entire administrational right of the trust to another agent unless it is regarded as unreasonable for the trustee to administer the trust personally

            2. Exception

               1. When the trustee needs to delegate the administrational right of the trust to an agent because it is regarded as unreasonable for the trustee to administer the trust personally, the trustee must act prudently in (a) choosing the agent, (b) establishing the extent of the delegation, and (c) periodically reviewing the actions of the agent 

         4. Duty to Reasonably Inform the Beneficiary

            1. Rule

               1. Trustee has a duty to inform the status of the trust to the beneficiary ** 

         5. Duty to Diversify

            1. Rule

               1. Trustee has a duty to diversify the trust investments unless it is prudent not to 

         6. Duty to Account

            1. Rule

               1. Trustee has the duty to give the beneficiaries a statement of income and expenses of the trust on regular basis **

         7. Duty of Due Care

            1. Rule

               1. Trustee has a duty to act as a reasonably prudent person dealing with his or her affairs

         8. Duty of Impartiality

            1. Rule

               1. Trustee has a duty to fairly balance/distribute the trust assets to the beneficiary in accordance with the trust, in order for the current beneficiaries and the remainder beneficiaries are treated equally **

            2. Additional Duties (when abiding by Duty of Impartiality) 

               1. Duty not to mix his or her personal funds to the trust funds 

               2. Duty to keep trust property productive

               3. Duty to follow the instruction of the trust

               4. Duty to Invest 

                  1. Definition: Duty to invest and administer trust assets impartially for the benefit of the beneficiary

                  2. Types of Duty to Invest

                     1. ​​​Prudent Person Rule

                        1. Definition: The rule is a guideline for the trustee when making financial decision using the principles of common sense and reasonable risk

                        2. Rule

                           1. The rule does not require a trustee to have extraordinary expertise. However, the prudent-person rule sets a reasonable expectation that the trustee will make rational, intelligent decisions when making investment choices on behalf of the beneficiary 

                           2. Clearly, there is no hard and fast rules. Generally, under the rule, it is implied that the funds may not be invested entirely in high-risk investments, and the assets may not be diverted to investments that would benefit another person instead of the beneficiary

                           3. Further, this rule does not require that all the investments made must be lucrative, however, the rule would prohibit the trustee from engaging in activities that could highly damage the asset of the beneficiary

                     2. Prudent Investor Rule

                        1. Definition: The rule is an investment plan, that complies with the trust document and state law, a trustee needs to prudently follow when dealing with fund of another person

                        2.  Rule

                           1. Under prudent investor standards, the trustee is judged by how the trustee administer the trust assets as a whole. That is, the only results that counts are the results of the whole "portfolio" of assets. Thus, if one asset does poorly, yet the success of other assets makes the whole portfolio of assets grow, then the trustee has fulfilled his duty to invest prudently **

                  3. Additional Duties (when abiding by Duty to Invest)

                     1. Duty of Loyalty (see above)

                     2. Duty to Diversify (see above)

                     3. Duty not to Delegate (see above)

                     4. Duty of Due Care (see above)

                  4. Remedy

                     1. When the trustee has breached the Duty to Invest along with the Additional duties above, the beneficiary can:

                        1. Remove ( = Fire) the trustee

                        2. Receive the profit the trustee generated

                        3. Recover loss

                        4. Receive constructive trust (i.e., an equitable remedy that may be imposed by the court when a person is receiving unjust enrichment through the use of property that rightly belongs to a possessor. And through the imposition of constructive trusts, the person needs to transfer the property back to the rightful possessor) & equitable lien (i.e., an equitable remedy that forces a party to relinquish the benefit he or she has unjustly enriched detrimental to another party). The difference between “constructive trust” and “equitable lien”, which both are equitable remedies, is that the former is a transfer of property back to the rightful possessor, while the latter is a claim or a legal right on property by the rightful possessor until he or she will be compensated 

                           1. Note that, under equitable lien (i.e., lien is a claim or a legal right against assets that are typically used as collateral to satisfy a debt), courts grant equitable lien to beneficiary under two conditions which is (a) when the trustee appropriated (i.e., take property without the permission by the possessor) a property wrongfully, and (b) when the beneficiary can prove that he or she has contributed to the property 

                           2. And the difference between “legal remedy” and “equitable remedy” is that the former is a remedy that involves fund in order to remedy the situation, while the latter is a remedy that requires a certain act to be done in order to remedy the situation

​

​

​

                                                                                                                       - The End - 

​

​

​

​