Trusts OL - Follows Dukeminier

8/10/2019 Trusts OL - Follows Dukeminier

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Trusts

Creation, Types & Characteristics

Introduction

Trust, generally speaking, is device whereby trustee manages propertyfor one or more beneficiaries (Bs).

Trustee has legal title to property & duty to manage it for B. Trusteemust have at least one active duty for trust to arise.

B, for whom trustee holds & manages property, owns equitable interest &has personal right to sue trustee for breach of duty.

Neither trustee nor B owns property to exclusion of other, but each ownsa different interest in the property.

Trust consists of 3 parties:

- settlor

- trustee

- B

One person can wear all three hats, as long as there is one other B whokeeps trustee accountable.

Settlor

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*Settlor is person who creates a trust. May be created duringsettlor*=*s life (inter vivos trust --revocable or irrevocable) or bywill (testamentary trust.)*

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To create trust, property owner transfers asserts to trustee, with trustinstrument or will setting forth terms of the trust. Properly draftedtrust sets forth both:

- dispositive provisions fixing Bs interests

- administrative provisions specifying powers & duties of trustee in

managing the trust estate.

Inter vivos trust may be created either by

- declaration of trust

- settlor declares that he holds certain property in trust.


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- settlor is trustee.

- requires neither delivery nor a deed of gift--all that is necessary isthat donor manifest intention to hold property in trust.

- If trust property is real property, Statue of Frauds requires awritten instrument for a declaration of trust.

- deed of trust - in which settlor transfers property to another personas trustee

Settlor of trust may be both trustee & B.

If settlor is NOT trustee of inter vivos trust, deed of trust isnecessary. In order to bring trust into being, deed of trust or trustproperty must be delivered to trustee.

Trustee

May be one or more trustees; may be individual or corp. Trustee may be

settlor or 3rd party, or trustee may be a B.

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*If settlor intends to create a trust but fails to name a trustee, courtwill appoint a trustee to carry out the trust. This rule is sometimesstated: *A*A trust will not fail for want of a trustee.*@

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*If T*=*s will names someone as trustee but named person refusesappointment or dies while serving as trustee, & will does NOT makeprovision for successor trustee, court will appoint successor trustee.

Does not apply if court finds (or trust instrument specifies) that trustpowers were personal to named trustee.*

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Trustee holds legal title to trust property. In managing trust property,trustee is held to a very high standard of conduct. Trustee is underduty to administer trust solely in interest of Bs; self-dealing (whereintrustee acts in same transaction both in its fiduciary capacity & inindividual capacity) is sharply limited & for some transactions isprohibited altogether.

Trust must preserve the property, make it productive, & where required

by trust instrument, pay income to B.

In investment decisions, trustee owes duty of fairness to both classesof Bs: income Bs (interested in income & high yields) & remaindermen(concerned about preservation of principal & appreciation in values.

Other important duties include:

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*- keeping trust property separate from trustee*=*s own property*

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- keeping accurate records

- investing prudently

- not to delegate trust powers.

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If trustee improperly manages trust estate, trustee may be deniedcompensation, subjected to personal liability, & removed as trustee by acourt.

In order to have a trust, it is necessary for trustee to have someduties to perform. If trustee has NO duties at all, there is no reasonto have, or to recognize a trustee. When a trust fails because trusteehas no active duties, Bs acquire legal title to trust property.

Law does not impose upon a person the office of trustee unless theperson accepts. Once a person accepts the office of trustee; can be

released from liability only with consent of Bs or by court order.

Beneficiaries

Bs hold equitable interests & have a personal claim against trustee forbreach of trust. This personal claim has no higher priority than claimof other creditors of trustee & thus might not protect Bs if breach oftrust were only remedy.

Equity gives Bs additional remedies relating to trust property itself.Personal creditors of trustee, other than trust Bs, can NOT reach trust

property.

If trustee wrongfully disposes of trust property, Bs can recover trustproperty unless it has come into hands of bona fide purchaser for value.

If trustee disposes of trust property & acquires other property withproceeds of sale, Bs can enforce trust on newly acquired property.

Private trusts almost always create successive beneficial interests.Typically, trust income is payable to B (or class of Bs) for life,


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perhaps to be followed by life interests in another class of Bs, withtrustee to distribute the trust corpus to yet another class of Bs upontermination of the trust.

Trust compared to a legal life estate

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*Trust in most cases preferable to legal life estate. If independenttrustee is NOT selected, life tenant should be made a trustee ratherthan being given a life estate. Most problems are administrativeproblems, & law of trust administration is well established & extensive.If trustee*=*s powers are not spelled out in trust instrument, law willsupply a charter of administration.*

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Creation of a Trust

Intent to Create a Trust

No particular form of words necessary to create a trust. Sole question

is whether grantor manifested intention to create trust relationship.

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*Where grantor conveys property to grantee to hold *A*for use &benefit*@*of another, this is sufficient manifestation of an intentionto create a trust.*

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Duty of showing that the account which trustee renders & expenditures heclaims to have been made were correct, just & necessary--must be madefor trust purposes. If he does not keep clear & accurate account,

presumptions are against him, with all obscurities & doubts beingresolved adversely to him.

Where parent is trustee of educational trust & he makes expenditures outof his own funds, his intent may be to discharge his moral & legalobligation to educate his child or to follow the directions of thetrust. Question of fact as to which of the 2 purposes parent-trustee hadin mind at the time of making the expenditures.

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*Custodial powers--custodian has power under the Uniform Gift to MinorsAct to use the property *A*as he may deem advisable for the support,maintenance, education & general use & benefit of the minor, in suchmanner, at such time & to such extent as custodian in his absolutediscretion may deem advisable & proper, without court order or withoutregard to the duty of any person to support the minor, & without regardto any other funds which may be applicable or available for the purpose.*

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Trustee powers---as trustee for educational trust, trustee has power touse trust funds for educational purposes only & has duty to render clear& accurate accounts showing funds have been used for trust purposes.

Precatory language:

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*Where T expresses wish that property devised should be disposed of bydevisee in some particular manner, but language does NOT clearlyindicate whether T intends to create trust or merely a moral obligation,trust is unenforceable at law. Typical language raising this issue is abequest *A*to A with the hope that A will care for B.*@

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*To fathom T*=*s intent, each will must be construed in accordance withlanguage used in each particular case in light of all the circumstances.Problem can be avoided by clear drafting: i.e., if only a moralobligation is desired, *A*I wish, but do not legally require, that Cpermit D to live on the land.*@

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Equitable charge--where T devises property to a person, subject topayment of a certain sum of money to another person, T creates anequitable charge.

Enforcing imperfect gift as a trust:

Gift requires delivery of subject matter. If gift fails for want of

delivery, transaction can be enforced as an oral declaration of trust bydonor. Majority of courts require clear & convincing evidence that atrust was intended.

Necessity of Trust Property

Since trust is method of disposing of, or managing, property, it is saidthat a trust cannot exist without trust property.

Trust property may be /any/ interest in property that can be transferred:

- contingent remainders

- leasehold interests

- chooses in action

- royalties

- life insurance policies

- anything that is called property


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Critical question is whether particular claim will be called property bya court.

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*Requirement of identifiable trust res distinguishes a trust from adebt. Trust involves a duty to deal with some specific property, keptseparate from trustee*=*s own funds. Debt involves obligation to pay asum of money to another. Crucial factor in distinguishing between trustrelationship & ordinary debt is whether recipient of funds is entitledto use them as his own & commingle them with his own monies.*

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Resulting trust: trust that arise by operation of law in one of 2situations:

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- where express trust fails or makes an incomplete disposition

- purchase money resulting trust-- where one person pays purchase pricefor property & causes title to property to be taken in name of anotherperson who is NOT a natural object of the bounty of purchaser.

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example: A pays O $10K for Blackacre: the deed conveying Blackacre namesB as grantee. Presumption arises that A did NOT intend to make a gift ofthe property to B but has some other reason for causing B to be named asgrantee. Unless presumption is rebutted, B hold title on resulting trustfor A. Can be rebutted by evidence showing that A did intend to make

gift to B, or that A made a loan to B of the purchase price.

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*Where B is A*=*s child, B is likely object of gift from A, presumptionarises that A intended to make gift to B. Can be rebutted by evidenceshowing that A intended to retain beneficial enjoyment and had a reasonfor placing title in B*=*s name.*

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Statutes of fraud does not apply, even though subject matter is realproperty, where resulting trust arises by operation of law.

Resulting trust does NOT contemplate ongoing fiduciary relationshipwherein trustee holds & manages property for B. Once resulting trust isfound, trustee must reconvey property to beneficial owner upon demand.


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Prevailing view is that a person can assign future earnings from anexisting K. Theory is that a person who has present ownership of themeans of producing a thing has a present interest in the thing to beproduced.

Future profits are not identifiable as trust res. Did not declare trustbut make a gift of the profits.

Taxation of Grantor Trusts pg. 597

Necessity of Trust Beneficiaries

Trust must have one or more Bs. Must be someone to whom trustee owesfiduciary duties, someone who can call trustee to account.

Exception: Bs may be unborn or unascertained when trust is created. Ifat time trust becomes effective Bs are too indefinite to be ascertained,attempted trust may fail for want of ascertainable Bs.

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/Clark v. Campbell /(1926)

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*T put personal property in trust & instructed trustees to distributeitems *A*to such of my friends as my trustees, shall select.*@

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By common law, cannot be a valid bequest to an indefinite person. Mustbe a B or a class of Bs indicated in will capable of coming into court &

claiming benefit of bequest. Class must be capable of delimitation.

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*Where T bequests *A*to relatives*@*can refer to statute of distributionto identify class. Word *A*friends*@*unlike *A*relations*@*has noaccepted statutory or other controlling limitations.*

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*In trusts today, B*=*s are often given powers of appointment... pg. 602*

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/*In re Searight*=*s Estate*/*(1950)*

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T gave dog to Florence (trustee) & directed executor to deposit $1K tobe used by him to pay Florence so much each month for car of dog.

Honorary trust --bequest for care of a specific animal. Called honorarybecause B (the animal) cannot enforce the purpose of the testator.

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*Modern authorities uphold validity of gift for purpose designated inhonorary trust where person to whom power is given is willing to carryout T*=*s wishes. Instrument creating such trust must limit duration oftrust to human lives so as not to violate Rule against Perpetuities.*

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T left a specific amount of money to be used that could be determined tolast only a certain period of time--limits duration to that within ruleagainst perpetuities.

If trustee refuses or when trust ends, remaining trust goes into aresulting trust.

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Honorary trust usually seen in care of animals, or bequests for erectionor maintenance of tombstones or monuments. If trustee refuses or quits,court will probably NOT appoint a new trustee.

Necessity of a Written Instrument

Inter vivos oral trust of personal property is enforceable. Statute ofFrauds requires any inter vivos of land to be in writing. Statute ofWills requires that testamentary trust be created by will.

Under certain circumstances, court will enforce inter vivos oral trustof land or an oral trust arising at death.

Oral Inter Vivos Trusts of Land

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*Where O conveys land to X upon an oral trust to pay the income to A forlife & upon A*=*s death to convey the land to B, S of F prevents

enforcement of express trust. Trend in cases is to prevent unjustenrichment of X by finding that X holds on a constructive trust for Bs.*

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*Constructive trust for Bs imposed where transfer wrongfully obtained byfraud or duress, where transferee, X, in confidential relationship withtransferor, or where transfer made in anticipation of transferor*=*sdeath. Most cases involve one of these situations.*


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More common than oral trust for 3rd party is oral trust for benefit oftransferor. Some of transferors are attempting to avoid their creditorsor spouses or to achieve some tax benefit.

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/Hieble v. Hiebel/ (1972)

Court generally finds constructive trust where fraud or abuse ofconfidential relationship. Where there is a confidential relationship,burden of proof rests on party denying existence of trust by clear &convincing evidence to negate such trust.

Oral Trusts for Disposition at Death

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/Olliffe v. Wells /(1881)

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P*= heirs*

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D*= trustee *

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*T devised her residuary estate to Rev. Wells *A*to distribute the samein such manner as in his discretion shall appear best calculated to

carry out wishes which I have expressed to him or may express to him.*@

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Court: Trust too indefinite.

Residuary bequest to Wells gives him no beneficial interest butexpressly requires him to distribute all property bequeathed to him. Heis a trustee.

Semi-secret trust--does not reveal disposition of trust. Cannot beenforced without knowing who Bs are.

If a person procures an absolute devise or bequest to himself by orallypromising T he will convey property to or hold it for benefit of 3rdpersons, & afterwards refuses to perform his promise, trust arises outof confidence reposed in him by T & of his own fraud, which a court ofequity, upon clear & satisfactory proof, will enforce against him atsuit of such 3rd persons.

Revocable Trusts


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*Under typical revocable inter vivos trust involving a /deed of trust/,trust settlor transfers legal title to property as trustee pursuant to awriting in which settlor retains power to revoke, alter, or amend thetrust & the right to trust income during lifetime. On settlor*=*s deathtrust assets distributed to or held in further trust for other Bs. Allproperty in trust passes outside probate.*

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All jurisdictions recognize validity of trust where property istransferred to another person as trustee & settlor reserves power torevoke trust during life. Settlor may also reserve income interest &testamentary power of appointment.

Majority jurisdictions require settlor to retain revocable power.

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*Testamentary trust, created in will, is irrevocable--can*=*t change itonce you are dead.*

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Revocable declaration of trust--settlor declares himself trustee forbenefit of himself during lifetime, with remainder to pass to others athis death.

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/In re Estate & Trust of Pilafas/ (1992)

Revocable inter vivos trust with assets created by T, who is settlor,trustee & B (with other Bs as well.) T executed will that poured overresidue into trust.

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*Both documents are missing upon T*=*s death.*

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Presumption as to will is that is was revoked/destroyed.

When settlor reserves power to revoke his trust in particular manner orunder particular circumstances, he can revoke it only in that manner orunder those circumstances. (here, revocation required writing fromsettlor to trustee--no such writing found--trust is good.)

Probated property passes by intestacy, so there is no residue to pourover into trust--trust remains funded by property created in trustinstrument.

Where settlor has NOT specified a mode of revocation, settlor couldexercise his power to revoke in any manner that sufficiently manifestedhis intention to revoke.


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/State Street Bank & Trust Co v. Reiser/ (1979)

Creditor seeks to reach assets of inter vivos trust to pay debt owed toit by estate of settlor of trust.

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*Revocable inter vivos trust was executed, with power to amend & revoke,& right during settlor*=*s lifetime to direct disposition of principal &income. Funded by capital stock of 5 closely held corps.*

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T applied to bank for loan indicating he had controlling interests incorps which owned most significant assets appearing on the financialstatement. Bank made unsecured loan & T signed demand note to order ofbank. T dies 4 months later.

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*Under trust, trustees *A*may in their sole discretion pay from

principal & income of this Trust Estate any & all debts & expenses ofthe administration of the Settlor*=*s estate.*@

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During lifetime of settlor, bank would have had access to assets oftrust. When person creates for his own benefit a trust for support or adiscretionary trust, his creditors CAN reach maximum amount which thetrust, under terms of the trust, could pay to him or apply for hisbenefit--even if trust contains a spendthrift clause.

Assets which pour over into such a trust, over which settlor did nothave control during his life, are NOT subject to the reach of creditors.

Nonprobate assets are NOT all treated alike.

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*- Life insurance proceeds or retirement benefits usually exempt frominsured*=*s creditors if payable to spouse or child.*

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- US savings bonds with a payable-on-death B may be exempt.

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*- Creditors of joint tenancy in land cannot reach land AFTER jointtenant*=*s death for deceased joint tenant*=*s interest has vanished.*

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trust never came into existence; claim they are entitled to T*=*s entireestate as her sole heirs at law. *

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Pour-over Statute: bequest or devise may be made to trustee(s) of atrust established or to be established if 1) trust identified,

2) terms of trust set forth in written instrument/regardless ofexistence, size of character of corpus of trust./

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Court: pour-over devise meets statutory conditions--act does not requirethat trust res be more than nominal or even existent

POUR-OVER DEVISE VALID

2) Trust A terminated upon finding its purpose--estate tax maritaldeduction--became impossible after divorce.

3) H interest in Trust B terminated though T failed to revoke or amend

trust after divorce.

Effect of Divorce on Wills statute: If, after executing will, T shall bedivorced, which revokes any disposition or appointment of property madeby the will to the former spouse. Devise pass as if former spouse hadfailed to survive T.

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*Evident from time & manner in which trust was created & funded thatT*=*s will & trust were integrally related components of a singletestamentary scheme. For all practical purposes, the trust, like thewill, spoke only at T*=*s death. For this reason, H*=*s interest in

trust revoked by operation of divorce/will statute.*

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*4) Colleges challenge remainder to neices & nephews as they are thrumarriage & none exist by blood--this class gift to *A*nephews &neices*@*therefore lapses for lack of identifiable Bs.*

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Extrinsic evidence admitted due to ambiguity regarding nephews & neices& found intent of T was neices & nephews by marriage.

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*Colleges argue divorce left T without neices & nephews. Court:divorce/will statute applies only to spouse & not spouse*=*s relative.*

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Unfunded life insurance trust --settlor names trustee of her inter vivostrust B of her life insurance policy but does not add any other funds orassets to trust.


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Funded inter vivos trust--settlor adds other assets to inter vivostrust. Funded revocable inter vivos trust has independent significancebecause trust instrument disposes of assets transferred to trust duringlife.

Unfunded revocable life insurance trust coupled with will pouring overprobate assets into trust creates a unified trust of both life insuranceproceeds & probate assets & is an inter vivos trust.

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*Testamentary trust created where trust created in will which designatesB of insurance proceeds *A*trustee named in my will.*@

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Revocation by divorce:

Recent statutes in some states provide that divorce revokes anyprovision in a revocable trust for the spouse, who is deemed to havepredeceased the settlor.

UPC revokes not only all provisions for divorced spouse but also anyprovisions for relative of divorced spouse. Revocation by divorce underUPC can be overcome only by express terms of governing instrument--notby extrinsic evidence.

Misc. Consequences of Inter Vivos Trust

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- Inter vivos trust is NOT recorded in public place.

- Inter vivos trust comes into being without any court order & is notsubject to court supervision whereas a testamentary trust is created bycourt order & trustee MAY have duty to account to court.

- General rule--settlor of inter vivos trust of personal property maychoose state law that is to govern trust. T may NOT have this freedom ofchoice.

- Revocable trust, like will, can be contested for lack of mentalcapacity & undue influence; however, in practice, it is more difficultto set aside a funded revocable trust than a will on these grounds.

i.e., heirs are not entitled to see trust instrument & if they bringsuit they will be able to learn trust terms, but they are thereforeforced to commit themselves to legal fees in a lawsuit wihout arealistic appraisal of their chances of winning.

- NO federal tax advantages to a revocable trust. Assets of revocabletrust included in gross estate of settlor.

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*- When one spouse wants some assurance that surviving spouse*=*sproperty will be disposed of in accordance with a mutual estate plan,both spouses can create a revocable trust of their property--to becomeirrevocable upon death of one spouse. This use of a revocable trust maybe especially attractive in second marriages & is much preferable totrying to control surviving spouse*=*s disposition by K.*

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Discretionary Trusts

Mandatory trust- trust MUST distribute all income.

Discretionary trust- trustee has discretion over payment of eitherincome or principal or both. Discretionary powers of trustee may bedrafted in limitless variety.

Spray trust - trustee distributes income to one or more members of a group.

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/Marsman v. Nasca/ (1991)

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*Where trustee holds discretionary power to pay principal for*A*comfortable support & maintenance*@*of B, trustee has duty to inquireinto financial resources of that B so as to recognize those needs.*

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*Discretion to trustees to pay B such amount *A*as they shall deemadvisable for his comfortable support & maintenance*@*is NOT absolute.Prudence & reasonableness furnish standard of conduct, NOT caprice &careless good nature, much less a desire on part of trustee to berelieved from trouble.*

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*There is duty of inquiry into needs of B that follows fromdiscretionary requirement of *A*prudence & reasonableness*@*.*

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B is now deceased. Trustee failed to inquire & pay funds to B underconditions of trust. Constructive trust in favor of Bs estate is imposedon amounts wrongfully withheld.

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*Secondary issue: trust instrument contained exculpatory clause as totrustee*=*s liability. Trustee drafted instrument & lower court


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therefore held trustee liable for damages. Reversed even thoughexclupatory clauses looked on with disfavor.*

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*Court: *A*Provisions inserted in trust instrument without anyoverreaching or abuse by trustee of any fiduciary or confidentialrelationship to settlor are generally held effective except as tobreaches of trust committed in bad faith or intentionally or withreckless indifference to interest of B.*@

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Courts will not uphold exculpatory clause in testamentary trust.

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*If trustee has simple discretion unqualified by *A*sole*@*or the like,courts will NOT substitute their judgement for trustee*=*s as long astrustee *A*acts not only in good faith & from proper motives, but alsowithin bounds of reasonable judgment.*@

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When instrument purports to free trustee from some or all of theselimitations, problems in construction arise.

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*At one extreme are instruments that give unlimited discretionary power

to trustee. But discretionary power *A*in trustee*=*s absolute &uncontrolled discretion*@*is NOT in fact absolute--*@*if it appears thattrustee has utterly disregarded interests of B, the Court will intervene.*@

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- Courts relying on Restatement good faith standard, declare thattrustee must NOT act capriciously or arbitrarily.

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*- Other courts apply reasonableness test even when discretion is*A*absolute*@*.*

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Appears that simple discretion & absolute discretion is one of degree


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with more elasticity in concept of reasonableness the greater thediscretion given.

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*Another source of litigation is whether trustee, in exercisingdiscretionary power to spend income or principal for B*=*s support, mayconsider other resources of B. Where not dealt with in instrument, issuemay end up in court. Majority--presumption that settlor intended B toreceive his support from trust estate regardless of B*=*s otherfinancial resources where trust silent as to other assets. *

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*Duty of trustee inquiry & then decision to distribute based onproviding funds to enable B to maintain *A*manner in which B accustomedto.*@

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*Trustees have fiduciary duty to income B*=*s & principal B*=*s(remainderman). Trustees tend to favor principal B--paid out of principal.*

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Where trust for life support & principal not enough to last life, OK fortrustee to try to spread out & make it last.

Spendthrift Trusts: Creditors Rights

Spendthrift trust - Bs can NOT voluntarily alienate their interests norcan their creditors reach their interests. Created by imposing disablingrestraint upon Bs & their creditors.

Spendthrift trust recognized in almost all jurisdictions.

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*In NY, all trusts spendthrift unless settlor expressly makes B*=*sinterest transferable. In other jurisdictions trusts are NOT spendthriftunless settlor inserts spendthrift clause.*

*//

/Shelley v. Shelley/ (1960)

Trust provides:

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- income to wife, remainder of income to son.

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*- disbursement from principal after son 30 & upon approval of eitherone of son*=*s uncles.*

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*- trustee may *A*make disbursements for use & benefit of my son, Grant,or his children, in case of any emergency arising whereby unusual &extraordinary expenses are necessary for proper support & care of mysaid son, or said children...*@**

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- contains spendthrift clause.

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Son marries twice & has 2 children by each wife. Divorces both. Firstdivorce--court orders child support. Second marriage--court orders child

support & alimony. Son disappears & ex-wives want to subject trust totheir support awards.

R1-although trust is spendthrift trust or trust for support, interest ofB can be reached in satisfaction of enforceable claim against B by wifeor child of B for support, or by wife for alimony.

1) availability of income of trust to claims

Trust places no conditions on upon right of son to receive trust incomeduring his lifetime. Can reach income UNLESS spendthrift provisionprecludes them from doing so.

Public policy requires that interest of B in trust should be subject toclaims of his children. Though justification for permitting claim foralimony is not as clear, majority of cases hold that spendthriftprovisions do NOT bar claim for alimony.

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*Holding: B*=*s interest in INCOME of trust subject to claims foralimony & support for children as provided under both decrees fordivorce. Claims limited--claimants may reach only that much of incomewhich trial court deems reasonable under circumstances. Reasonablenessfactors:*

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- respective needs of H & W

- needs of children

- amount of trust income

- availability of corpus for various needs


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- any other factors which are relevant in adjusting equitably theinterests of claimants & B

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2) availability of corpus to claims

Son has no interest in corpus until trustee gives it, & until thenclaimants can NOT reach it.

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*Trust directed & authorized trustee, in exercise of sole discretionupon death of settlor*=*s wife, to make disbursements to son & son*=*skids. Disbursements to be made *A*in case of any emergency arisingwherby unusual & extraordinary expenses are necessary for proper support& care of my said son, or said children...*@*Emergency includescircumstances here where children are deserted by their father & are inneed of support.*

*

Invasion of corpus only if necessary to first reach income incircumstances above & then income is insufficient.

Protection of spendthrift trusts from creditors have several exceptions:

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*- spendthrift trust can NOT be set up by settlor for settlor*=*s ownbenefit. Creditors of settlor can reach settlor*=*s interest in income

or principal in mandatory trust. In discretionary trust, creditors canreach max amount trustee could, in trustee*=*s discretion, pay settloror apply for settlor*=*s benefit.*

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*- judgments for child or spousal support can be enforced againstdebtor*=*s interest in spendthrift trusts in majority of states. Insubstantial minority, spouse or child cannot reach spendthrift trust tosatisfy judgments for support.*

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*- person who has furnished NECESSARY services or support can reachB*=*s interest in spendthrift trust.*

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*- US or a state can reach B*=*s interest to satisfy a tax claim against B.*

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*- In several states, B*=*s creditors can reach that part of spendthrift


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income in excess of amount needed for support & education of B. i.e., inNY, in determining what is necessary for support of B & what is excess,courts developed station-in-life rule--which rendered excess-incomestatutes relatively useless to creditors--accustomed manner of living ofchild--B is likely to require full income from trust.*

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- In a few states, creditor is permitted to reach certain percentage(usually 10-30%) of income of spendthrift trust B in a garnishmentproceeding ordinarily applicable to wage earners.

- In several states, $ limits placed on amount that can be shielded inspendthrift trust.

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*- In majority of states, spendthrift restraint may be imposed uponremainder interest as well as upon income interest in trust. Ifrestraint imposed on remainder interest, remainderman*=*s creditorscannot reach principal of trust until remainderman is entitled toreceive principal.*

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- beneficial interest in spendthrift trust cannot be reached bycreditors on bankruptcy--does not pass to trustee in bankruptcy.

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Support Trusts

Support trust requires trustee to make payments of income (or, ifspecified, of principal too) to B in amount necessary for education orsupport of B in accordance with ascertainable standard.

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*Creditors of B of support trust can NOT reach B*=*s interest, exceptsuppliers of necessaries may recover thru B*=*s right to support.*

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*Discretionary trust gives trustee discretion to pay over income or

principal or to withhold it completely. Courts can NOT compel trustee toexercise discretion (absent improper motive or, perhaps unreasonablejudgment.) Since B can NOT compel trustee to make payment, neither canB*=*s creditor.*

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*Creditor may, in some states, be entitled to order directingdiscretionary trustee to pay creditor before paying B. Trustee need NOTpay any part of trust fund to B, but if trustee determines to do so,


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trustee must pay creditors who now stand in B*=*s shoes.*

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Modification & Termination of Trusts

If settlor & all Bs consent, trust may be modified or terminated. No oneelse has any beneficial interest in trust. Trustee has no beneficialinterest & can NOT object. Such a right exists even if trust contains aspendthrift clause.

If settlor is dead or does NOT consent to modification or termination oftrust, question arises whether Bs can modify or terminate trust if theyall agree.

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/In re Trust of Stuchell /(1990)

*

P*, trust income B, petitioned court to approve, on behalf of herretarded son--a remainderman of trust, an agreement which had beenapproved by other income Bs & remaindermen, to modify trust. If trust

not modified, son*=*s remainder will be distributed directly to him ifhe survives 2 life-income Bs which will severally limit his ability toqualify for public assistance.*

**

*Stated purpose of elaborate modification is to ensure that trust fundsbe used only as a secondary source of funds to supplement, rather thanreplace, son*=*s current income & benefits from pubic assistance.*

*

R2: Court will direct or permit trustee to deviate from term of trust if

owing to circumstances not known to settlor, & not anticipated by him,compliance would defeat or substantially impair accomplishment ofpurposes of trust; & in such case, if necessary to carry out purposes oftrust, court may direct or permit trustee to do acts which are NOTauthorized or are forbidden by terms of trust.

Court will NOT permit or direct trustee to deviate from terms of trustmerely because such deviation would be more advantageous to Bs thancompliance with such direction.

//

/Hamerstrom v. Commerce Bank of Kansas City/ (1991)

*

P*is B of trust which currently provides $150 per month for her life tobe distributed to her husband upon her death, or if he does NOT surviveher, to their 2 sons. *P*/B requests deviation by which court wouldorder trustee to increase monthly payments to $2K. *P*cites changes ineconomic condition as necessitating increase--inflation, husband*=*s


22/68

retirement & increased health care costs.*

**

*Husband & sons agreed to deviation, but GAL for *A*unknown &unascertainable*@*Bs of the remainder in the trust opposed the actionbased on statute:*

*

When all adult Bs who are NOT disabled consent, court may, upon findingthat such variation will benefit disabled, minor, unborn & unascertainedBs, vary the terms of a private trust so as to eliminate the interestsof some Bs & increase those of others, to change the time or amounts ofpayments & distributions to Bs, or to provide for termination of thetrust at a time earlier or later than that specified by the terms.

*

*

Statute modified /Claflin/ rule:

Trust cannot be terminated prior to date specified by terms of trust

where material purpose of settlor has not been attained, even if all Bsconsent to its termination.

*

*Court found that T*=*s intent was to limit distribution of his estateto those persons he specifically identified within the will.--especiallycompelling is lack of reference to heirs of sons--who therefore are NOTB*=*s.*

**

*Unknown B*=*s does NOT include potential interest of T*=*s heir as the

corpus may revert back to them if all remainderman predecease the life Bwithout issue.*

*

Bs refers to those persons, including unborn & unascertained issue,individually named or who are intended in a named class, identified by Tin the testamentary trust & for whom T expressed intent to make provision.

Attorney fees:

***

*Trust B may recover atty fees from trust estate where efforts of Bresult in real benefit to the estate. i.e., trust instrument which is soambiguous that 2 or more persons may fairly make adverse claims to thefund is an example of a situation justifying awarding costs & atty fees.Also been allowed when trustee*=*s duties are so ambiguous & he sues forjudicial construction of the testamentary trust.*

*


23/68


24/68

- it is a spendthrift trust,

- B is NOT to receive the principal until attaining a specified age,

- it is a discretionary trust

- it is a trust for support of B.

Such provisions are usually deemed to state a material purpose of settlor.

*

*May be possible to terminate testamentary trust by compromise agreementbetween Bs & heirs entered into soon after T*=*s death. Most court willapprove compromise agreements that deliberately eliminate trusts, evenspendthrift trusts. Some courts refuse to approve a will compromisewhere compromise destroys trust that is essential to material purpose ofsettlor.*

*

Trust NOT void merely because it can extend beyond perpetuities period.RAP indirectly limits duration of trust by requiring that equitableinterests in trust must be certain to vest or fail within 21 years afterdeath of all persons who can affect vesting of interests. Even thoughsettlor can create trust that may extend beyond perpetuities period,settlor cannot prevent termination of trust by Bs when perpetuitiesperiod has expired. This is a limitation upon /Claflin/ rule.

Changing Trustees

Unless trustee has been guilty of breach of trust or has shown

infirmness, Bs cannot have trustee removed. Standard rule--settlorreposed special confidence in designated trustee & court will NOT changetrustees merely because Bs want to.

Inability of Bs to change trustee lessens competition among trustcompanies & contributes to high fees.

Consider that in some states, entire inventories of trust accounts areroutinely bought & sold between banks. Bs may currently be served by abank or trust company never selected by the settlor.

*

*Ca authorizes court to remove trustee where trustee*=*s compensation isexcessive or for other good cause, upon petition of B. *

*

Charitable Trusts

Trust must have charitable purpose, at least predominantly, to be valid.

//


25/68

/Shenandoah Valley National Bank v. Trust/ (1951)

*

*Settlor instructs trustee to distribute income of trust among all1st-3rd graders at John Kerr School at Christmas & Easter time. Ifdominant intent as expressed is charitable, trust will be sustained. IfT*=*s intent is benevolent-trust invalid as violating rule againstperpetuities.*

*

Restatement: charitable purposes include--

****

- relief of poverty - advancement of education

- advancement of religion - promotion of health

*

*- govt*=*al or municipal purposes, & *

*

- other purposes the accomplishment of which is beneficial to the community.

*

**

*

Charitable trusts are favored creatures of law enjoying specialsolicitude of courts of equity.

Where gift results in mere financial enrichment, trust sustained onlywhen found & concluded from entire context of will that the ultimateintended recipients were poor or in necessitous circumstances.

______

In general, charitable trust is exempt from Rule Against Perpetuities &may endure forever. This exemption is NOT given to a trust for

noncharitable purposes.

At common law, noncharitable trust is void ab initio if it can lastlonger than perpetuities period. Majority of jurisdictions have modifiedcommon law rule against perpetuities by adopting wait-and-seedoctrine--where court does not determine validity of interest by whatmight happen, but by what actually happens. If jurisdiction waits forcommon law perpetuities period to expire before declaring trust void, anoncharitable purpose trust can endure for 21 years.


26/68

To be classified as charitable, trust that is for benefit of class ofpersons & not for benefit of community at large must be for relief ofpoverty or for advancement of education, religion, health, or othercharitable purpose.

Trust may be valid charitable trust although persons who directlybenefit are limited in number. Trust awarding scholarships or prizes foreducational achievement is charitable. Trust to educate a particularperson or named persons is NOT charitable--neither is a trust to educatedescendants of settlor.

Are these charitable trusts:

- trust for benefit of students of chase law-- YES, indefinite group &educational purpose

- trust for education of Chase College of Law students as long as schoolexists, then for education at UC College of Law--one charitable trustfollowed by another---OK

- establish charitable trust for benefit of education of students atChase, when ceases to exist, then Peirson. Private trust followingcharitable trust--NOT OK, neither is reverse, private trust -->charitable trust

Against public policy to endow perpetually a political party; hencetrust to promote success of particular party is NOT charitable. Trustfor improvement of structure & methods of govt, in manner advocated byparticular political party, is charitable.

Trust with purpose of bringing about a change in law may be charitable,provided purpose NOT to bring about changes in law by illegal means,such as revolution or illegal lobbying.

Common law confers power on state atty general to enforce charitable

trusts--largely formal supervision. Unless newspaper publicity is givento some alleged irregularity, atty general rarely investigates internalworkings of charitable foundations.

Only person other that atty general who can enforce a charitable trustis a person with a special interest as a B. Person must show that he orshe is entitled to receive a benefit.

Modification of Charitable Trusts: Cy Pres

Judicial cy pres -- property is given in trust to be applied toparticular charitable purpose, &

1) it is or becomes impossible or impracticable or illegal to carry outparticular purpose, &

2) if settlor manifested more general intention to devote property tocharitable purposes,

trust will NOT fail but court will direct application of property tosome charitable purpose which falls within general charitable intentionof settlor.


27/68

Trust document may provide what happens if purpose no longer possible.

//

/In re Nehr/ (1939)

Testamentary trust of property to build hospital for benefit of villageas memorial to husband. Village accepted & then realized could notafford to build hospital & did not need one as nearby village hospitalsufficient for their needs.

*

*Court allows cy pres finding settlor*=*s paramount intention was togive property for general charitable purpose & settlor grafted ongeneral gift specific manner in achieving. Grafted intentions may beignored.*

*

//

/In re Estate of Buck/ (1986)

Testamentary trust set up to benefit needy of 2nd wealthiest county inUS. Trust increased greatly in value & trustee petitioned court toexpand trust to benefit needy in surrounding counties. Court refused toapply cy pres where variation will meet desire & suit convenience oftrustee, or where more efficient use of fund is available.

______

Most commentators favor using cy pres where changing needs.

Courts have used cy pres when money has been left to an entity that doesNOT exist. i.e., gift to Cancer Research fund, a nonexistent entity, hasbeen given to the American Cancer Society, which sponsors cancer research.

*

*Cy pres should be contrasted with administrative deviation. Court willpermit deviation in administrative terms of trust when compliance woulddefeat or substantially impair accomplishment of purposes of trust. Notalways clear what is an administrative term & what is a centralpurpose--courts have been known to interpret *A*administrative*@*broadlyon appealing facts.*

*

//

/In re Wilson/ (1983)

Equal protection challenge to trust set up to benefit male students.


28/68

Court modified administration of trust to eliminate any stateparticipation--here is was submission by school principal of boysmeeting trust requirements.

Powers of Appointment

Powers of appointment held by trust Bs--powers that give Bs ability todeal flexibly with changing circumstances in future--with births, deaths& marriages in family; with ability of children to manage property; withchange in economy & investment returns; with changes in the law.

Often used to prolong making a decision. Special testamentary power ofappointment

Donor - person who creates power of appointment

Donee - person who holds power

Objects of power- persons in whose favor power may be exercised

Appointee - when power is exercised in favor of a person

Instrument creating power may provide for takers in default ofappointment if donee fails to exercise power.

General power - exercisable in favor of donee, his estate, hiscreditors, or creditors of his estate. May permit donee to do mostthings an owner of fee simple could do. This is true of a general powerpresently exercisable.

Special power - power NOT exercisable in favor of donee, his estate, hiscreditors, or creditors of his estate. When there is a limited number ofpersons donee can appoint to. Most common special power is power toappoint among issue of donee.

*

*Inter vivos power -- exercisable by deed. Can be exercised at any timeduring donee*=*s lifetime.*

*

Testamentary power-- exercisable only by will

*

*If creating instrument does NOT name a taker in default, propertypasses back to donor or donor*=*s estate if power is NOT exercised.*

*

Almost all powers of appointment are created in trustees or in Bs of trusts.

Property subject to /special power/ of appointment viewed as owned bydonor. Applied thru doctrine of relation back.

Donee of general power treated as owner of appointitive property forincome, estate & gift tax purposes.


29/68

//

/Irwin Union Bank & Trust v. Long/ (1974)

Inter vivos general power of appointment donee has NO control over trustcorpus until he exercises his power of appointment--trustee has absolutecontrol & benefit of trust corpus within terms of trust instrument.

Majority:

Where power is special power, power to appoint only among a group ofpersons, power is NOT beneficial to donee & cannot be reached by hiscreditors.

Where donee of general power created by some person other than himselffails to exercise power, his creditors cannot acquire power or compelits exercise.

*

*If donee exercises power by appointing to another, appointitive assets

somehow pass into donee*=*s hands (or estate) for a scintilla of timeand, while in donor*=*s hands (or estate), equity seizes assets forbenefit of creditors.*

**

*In number of states, statutes enable creditors of donee of GP presentlyexercisable to reach appointitive property, usually with qualificationthat creditors must first exhaust donee*=*s own assets before resortingto appointitive property. Under these statutes, creditors of generaltestamentary power can also reach property but only at donor*=*s death.*

*

If donee of general power is also donor of power, creditors may reachappointitive assets.

Spouse of donee--

*

*If surviving spouse of donee seeks to reach appointitive property atdonee*=*s death under elective share statutes, donee of general power,as well as donee of a special power, is NOT, in most states, treated asowning the property. Since a surviving spouse has a claim againstdonee*=*s probate estate & appointitive assets are NOT in donee*=*s

probate estate, spouse may NOT reach them.*

*

UPC changes this rule & includes in the augmented estate subject toelective share any property over which decedent had a general power ofappointment.


30/68

Bankruptcy--

*

*Under federal bankruptcy act, general power presently exercisablepasses to donee*=*s trustee in bankruptcy, but a special power & ageneral testamentary power do NOT.*

*

Estate Tax --presently exercisable may be subject to estate & gift taxes.

SP not subject to estate tax.

Because of adverse tax consequences, general powers rarely created bytrust settlor in anyone except surviving spouse.

Has been held that a lawyer who drafts wills & trusts is liable formalpractice if lawyer does not know tax consequences of powers ofappointment.

Creation of a Power of Appointment

Intent to Create a Power

*

*To create a power of appointment, donor must manifest an intent to doso, either expressly or by implication. No particular form of words isnecessary--i.e., *A*power of appointment*@*or *A*appoint.*@

*

Power of appointment confers discretion on donee, who may choose toexercise the power or not, & is to be distinguished from a direct

non-discretionary disposition by donor.

Words that merely express a wish or desire (precatory words) do NOTcreate a power of appointment in absence of other circumstancesindicating a contrary intent.

Powers to Consume

One of the most frequently litigated problems in regard to creation ofpowers is whether a power to consume principal has been created, & ifso, what standard governs the exercise of the power.

*

*Rule of repugnancy--where there is a grant, devise, or bequest to onein general terms only, expressing neither a fee nor life estate, & thereis a specific limitation over what remains at first taker*=*s death, ifthere is also given to first taker an unlimited & unrestricted power ofabsolute disposal, express or implied, first taker has a fee.*

*


31/68

Good atty will NEVER create a legal fee simple with power to consume--orcreate a legal life estate at all. Trust with life B is preferable inalmost all situations.

If life B of trust is to have rights to consume principal, atty draftingwill or trust should make it as clear as possible under exactly whatcircumstances the life tenant can reach the principal.

Release of a Power of Appointment

Donor of a life estate coupled with a testamentary power usually intendsto protect the donee from an indiscreet or unwise exercise of the powerduring life. A testamentary power has as one of its purposes keeping thedonee free to exercise discretion up until the moment of death. Hence,the donee of a testamentary power of appointment can NOT legally K tomake an appointment in the future.

*

*Restitution available as measured by what contracting party lostagainst donee*=*s estate not from the trust assets.*

*

Donee can release so property go to taker by default or back to donor.Release of a power prevents the donee from exercising the power thereafter.

If presently exercisable special power can K to appoint as long as toproper object.

Exercise of a Power of Appointment

*

*Exercise by Residuary Clause in Donee*=*s Will*

*

Large majority of jurisdictions take position that residuary clause doesNOT exercise a power of appointment held by T. States adhering tomajority rule differ on whether

//

/Beals v. State Street Bank & Trust Co./ (1975)

*

*T has life estate with testamentary general power of appointment. Willdirected that upon default of appointment, daughter*=*s sharedistributed by laws of intestacy.*

**

*Partial release of general power to limit her exercise thereof to


32/68

dad*=*s descendants--creating a special power.*

*

T did NOT expressly exercise power of appointment--but her residuaryleft to her nieces & nephews, including any power of appointment she hadfrom H.

*

*Most court*=*s interpret donee*=*s will under law governingadministration of trust--usually law of donor*=*s domicil.*

**

*Under law of state where trust administered, a general residuary clausedid NOT exercise a special testamentary power of appointment. Whileunder state of donee*=*s domicile, residuary clause in will exercisesnot only a general power of appointment but also a special power ofappointment.*

*

_____

Most courts would find a general residuary clause without more would notexercise a power of appointment, general or special. Minority find thata residuary clause exercises a general power unless a contrary intentaffirmatively appears.

If appointitive asset is land, law of jurisdiction where land is locatedgoverns. If appointitive assets are personal property, donor of powermay be able to select the law to govern the trust.

****

- If power created by inter vivos trust, donor may select law ofdomicile of donor, or donee, or of state where trust is administered.

*

*- courts split where power created by testamentary trust. Some statespermit donor*=*s intent to control while others apply law of donor*=*sdomicile to a testamentary trust & do NOT permit donor*=*s intention tocontrol.*

*

*

**

**

*To prevent an unintentional exercise of power of appointment, donor mayprovide that the power can be exercised only by an instrument, executed


33/68

after date of creating instrument, that refers specifically to power.However, different courts may have different ideas about whether generallanguage in donee*=*s will *A*blending*@*appointitive property withdonee*=*s own property is a specific reference to power.*

*

Limitations on Exercise of a Special Power

In almost all jurisdictions, donee of general power of appointment canappoint outright or in further trust & can create new powers of appointment.

*

*With respect to a special power of appointment, donee*=*s authority ismore limited. *

*

Under R2, donee of a special power can

- create a general power in an object of special power

- create a special power in any person to appoint to an object of

original special power--this includes an appointment in further trust,giving trustee discretionary power to appoint to the objects.

Exclusive power of appointment--allows donee to select who among classcan take & what

Nonexclusive special power of appointment--must give to all amongclass--each permissible object

Can specify in instrument whether exclusive or nonexclusive, withdefault being exclusive under the R2 & majority. In addition, under R2,

special power is exclusive unless the donor specifies the minimum share.

*

*Whether a power is exclusive or nonexclusive depends upon the intentionof the donor as revealed by the creating instrument. i.e., a power toappoint to *A*any one or more of A*=*s issue*@*creates an exclusive power.*

**

*If creating instrument does not reveal donor*=*s intent, classificationwill turn upon presumption adhered to in jurisdiction.*

*

Fraud on a Special Power

Appointment in favor of person who is NOT an object of power is invalid.Appointment to an object for purpose of circumventing the limitation ona power is a fraud on the power & is void to the extent it is motivatedby such purpose.


34/68

Ineffective Exercise of Power

Capture:

***

*If donee of power makes ineffective appointment, & donee*=*s intentcannot be given effect through allocation of assets, general rule isthat property passes in default of appointment or, if there is nodefault, to donor*=*s estate. EXCEPTION--doctrine of capture whichcaptures property for donee*=*s estate.*

*

Capture occurs when donee of general power manifests an intent to assumecontrol of the appointitive property for all purposes & not merely forlimited purpose of giving effect to expressed appointment. Rest uponconception that inasmuch as donee of a general power could appoint toher estate, appointitive property will pass to her estate if she wouldprefer that in case of an ineffective appointment.

Ineffective appointments raise issue of whether capture applies usuallyinvolve lapse of an appointment to a dead appointee, or violation ofRAP, or failure of donee to comply with some prescribed formality inexercising power.

*

*Intent of donee to assume control of appointitive property for allpurposes is most commonly manifested by provisions in donee*=*s willthat blend owned property of donee with appointitive property. Requisiteblending can occur in a residuary clause disposing of both appointitiveproperty & donee*=*s own assets or in introductory clause stating that

donee intends appointitive property to be treated as her own property.*

*

Applies only to general powers & only when attempted exercise of generalpower is ineffective or incomplete

*

*

Doctrine of allocation:

***

*Applies to special power of appointment, if donee blends bothappointitive property & donee*=*s own property in a common disposition,blended property is allocated to various interests in such a way as toincrease the effectiveness of the disposition. Occurs when an allocationis made to a party NOT an object of the special power--their allocationmust be from non-trust funds.*


35/68

*

To satisfy completely ineffective appointment, allocation requires thatdonee have property of her own sufficient for appointitive property.

*

*Blending requirement may be met by a residuary clause disposing of bothappointitive property & owned property. Suppose A had bequeathedappointitive property to B (not in the class) & her own property to D.Since A did not blend property but had specifically bequeathedappointitive property to B, appointment would fail & none of A*=*s ownedassets would be allocated to B.*

*

*

*

Failure to Exercise a Power of Appointment

Implied gift theory--recognized where donee has special power & class ofpotential takers is small, court could imply a gift in favor of possibletakers & they would take in equal shares.

//

/Loring v. Marshall /(1985)

Donee exercised power of appointment to wife, income for life. Noexercise of appointment as to principal.

*

*Charities named as takers in default. They do not take as donee made apartial appointment (to his wife) which was enough to wipe out theirdefault. Default must have occurred at time of donee*=*s death.*

*

Issue: what disposition should be made of the principal in the absenceof any explicit direction in the will?

Restatement & Scott on Trusts: when a special power of appointment isNOT exercised & absent specific language indicating an express gift in

default of appointment, property not appointed goes in equal shares tomembers of class to whom property could have been appointed.

*

*Implied gift theory--class of takers small, rather have class thanheirs of donor. Class here was nephew*=*s issue (one son--deceased afterdad) & wife--who could only, by terms of trust, take income oftrust--which left son as only class member who can take principal.*


36/68

*

____

imperative special power of appointment --creating doc shows intent thatpermissible appointees are supposed to be benefitted even if donee failsto exercise power. If special power is imperative, donee must exerciseit or court will divide assets equally among potential appointees.

In most cases it is not likely to make any difference whether a courtadopts an implied gift in default or an imperative power theory. Sameresult is ordinarily reached under both because both are based oninferred intent of donor.

*

*Example where difference results. Special power to wife to appoint toone of four nephews. Upon failure to appoint, under implied gift theoryeach nephew takes 1/4 share. But under imperative special power ofappointment, intent that gift go to one nephew requires court to choose1, which they cannot--property goes back to donor*=*s estate.*

*

Construction of Trust Instruments

*

*Courts construe an instrument in order to construct an estate plan. Inthe process, rules of construction are developed & must be heeded bylawyers in constructing their client*=*s estate plans.*

*

Preference for Vested Interests

Preference for vested interest rather than contingent remainder. Vested

remainder NOT subject to destructibility doctrine (neither iscontingent), land more alienable, allows acceleration, not subject toRAP (unless subject to open.)

Transferability & Taxation

Vested remainders, including defensibly vested ones, were transferableinter vivos. Over 40 states have by statute or judicial decision madecontingent remainders transferable.

*

*A future interest, like a possessory estate, is an interest in property& subject to federal gift & estate taxation. Where O *A*conveys propertyin trust to A for life, then to B*@*, if B dies during A*=*s lifetime,value of B*=*s remainder is subject to estate taxation because it istransmitted at death. Federal estate & gift taxation turns on whether afuture interest is transmissible, not upon whether it is vested orcontingent. *

**


37/68

*Tax code provides that if the value of a remainder or reversion isincluded in decedent*=*s taxable gross estate, decedent*=*s executor mayelect to postpone paying the tax until 6 months after termination of thepreceding life estate. *

**

*If a future interest is subject to gift or estate taxation, value ofthe future interest depends upon life tenant*=*s life expectancy &market rate of interest. Federal govt publishes life expectancy tables &valuation tables for future interest that must be used.*

*

When future interest cannot be valued by resort to mortality tables,(for example where it may be destroyed by trustee using principal tosupport life tenant,) interest is valued with reference to all relevantfacts, including likelihood of contingent events happening.

To avoid potential taxation of future interest at death of its ownerprior to death of life tenant, do not create a transmissible futureinterest. i.e., give remainderman power to transmit the future interestat death by giving him a contingent remainder upon surviving plus a

special power of appointment--property subject to a special power ofappointment is NOT subject to estate taxation.

Acceleration into Possession

If an interest ends early, next /vested/ interest is accelerated intopossession.

**

ie., O to A for life, remainder to B

*

*A disclaims, B*=*s vested remainder accelerates into possession & nowhave fee simple*

*

*

*//

/Contingent/ remainder does not accelerate because remaindermen is NOTentitled to possession until they are all ascertained & any conditionprecedent has occurred. When life tenant disclaims life estate, courtsdecide the disclaimer on what T probably would have intended had heanticipated disclaimer. Because this meant that almost every case ofdisclaimer had to be litigated, legislatures passed disclaimer statutes.Under these statutes, disclaimant is treated as having predeceased T, &remainders take effect or fail proceeding on this assumption. State


38/68

disclaimer statute may be different from federal (which requiresdisclaimer within 9 months after created.)

//

/In re Estate of Gilbert /(1992)

*

*Action: executor asks court to declare null & void a renunciation bysettlor*=*s son of his interest in 2 wholly discretionary trusts.Executor*=*s duty to carry out settlor*=*s intention & disclaimer contrato that intent. Executor joined by any potential children of son.*

*

Trust provision--Income to son for life, then to his issue

*

*Remainder interests in son*=*s trusts will be accelerated unlesssettlor provided otherwise.*

**

*Son viewed as having predeceased settlor. Son has no issue--revertsback to settlor*=*s estate*

**

*Under UPC, & similar uniform disclaimer acts, donee of a contingent ordefensibly vested interest may wait until 9 months after interestbecomes indefeasibly vested to disclaim. Permits contingent remaindermanto decide at life tenant*=*s death whether to accept the property or not.*

*

Tax policy: transfer tax imposed on each living generation. Federal govtimposes a generation-skipping transfer (GST) tax upon any transfer to agrandchild or other person 2 or more generations removed from thetransferor.

***

*i.e., T devises property in trust *A*for my daughter A for life, thento my granddaughter B, if B survives A & if B does not survive A, toB*=*s issue.*@**

**

*An estate tax is payable at T*=*s death & a generation skippingtransfer tax is payable at A*=*s death, when possession of the propertyis transferred to T*=*s granddaughter. If A disclaims her life estate atT*=*s death, a GST tax is payable at T*=*s death, when B takespossession, rather than at A*=*s death.*

*


39/68

*

*

Surplusage

In a few situations, courts have treated words that might appear tostate a condition precedent as mere surplusage. Courts say that theinstrument means the same thing with or without the surplus words, & byeliminating surplus words, the courts manage to vest the remainder.

**

i.e., O conveys to A for life, then to B for life if B is then living,then to C.

A - life estate

B - remainder life estate, contingent upon surviving

*

*B - *A*then living*@*- some courts hold surplusage words, others viewas contingent remainder*

*

*

*//

/Edwards v. Hammonds/ (1683)

*

*O for life, then to O*=*s eldest son A & his heirs/if A attains the ageof 21/, but if A dies under 21, to O & his heirs.*

*

Surplusage is that in italics-- if A attains the age of 21. Court:present devise to eldest son, subject to & defeasible by conditionsubsequent--his attaining the age of 21.

O - life estate, contingent remainder, reversion subject to springingexecutory limitation

A - eldest son, fee simple subject to shifting executory limitation tograntor

*

*B- youngest son, could be contingent remainder subject to brother*=*sshifting executory interest*

*


40/68

____

Where age contingency stated both as condition precedent & conditionsubsequent--CP invalid.

//

/Edwards/ rule limited to age contingency & limited to gift toindividual--never to a class.

Requiring Survival to Time of Possession

*

*No requirement that a remainderman live to time of possession. Ifremainderman dies before life tenant, the remainder passes toremainderman*=*s estate.*

*

//

/First National Bankof Bar Harbor v. Anthony/ (1989)

*

*Revocable inter vivos trust with remainder to 3 kids. 1 kids diesduring life of settlor. Settlor dies without amending or revokingtrust--split between kids, with deceased B*=*s kids sharing dad*=*sshare & 2 living kids arguing that dead brother*=*s share divested uponhis death.*

*

Court: This is a vested remainder subject to divestment (subject t oamendment or revocation of trust)--settlor never exercised amendment orrevocation powers--interest vested in all kids.

//

/Security Trust Co v. Irvine/ (1953)

Trust provisions:

*

*

Trust terminates upon death of life tenants--2 of settlors youngerspinster sisters--Mary & Martha.

*

*Upon termination--equally divided among my brothers & sisters (total of5 sibs), their heirs & assigns forever, the[ issue of any deceasedbrother or sister to take his or her parent*=*s share.] CS*


41/68

**

*

Interest in remainder vested upon death of T NOT upon death of last lifeestate tenant.

*

*Rule--fact that life tenant is member of class, in absence of any clearindication in will to contrary, does NOT prevent life tenant fromparticipating in remainder of T*=*s estate as a part of the class.*

*

If deceased sib had children, their share went to kids--subject todivestment to their children.

If deceased sib had NO children, then divesting condition does notarise--remainder interest goes as will devises--looks like power ofappointment.

Sibs without kids interest subject to estate tax--estate closed--their

shares to be distributed by trustee directly to persons entitled toreceive the same, the trustee first seeing that any taxes due are paid.

Divide & pay over--minority rule

gift to a class with no other words, remainder contingent onsurvivorship. Class members must survive until property is divided inorder to share.

*

*Although courts do NOT imply survival requirements in gifts tosingle-generational classes, such as *A*children*@*or *A*brothers &sisters*@*, they do imply survival requirements in gifts tomulti-generational classes, such as *A*issue*@*or descendants.*@

**

*When T inserts word *A*surviving*@*in trust instrument, word isambiguous unless an additional word or words tell us at what time doneemust be surviving. Majority of cases view that *A*surviving*@*meanssurviving to time of possession.*

*

*

*T bequests a fund in trust *A*for A for life, then to B, but if B dieswithout issue surviving her, to C.*@

**


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Gifts to classes

Per Stirpes Distributions

*

*Law presumes that word *A*children*@*means only immediate offspring ofparent & does NOT include grandchildren. *

*

Sometimes question of whether T meant by children persons other thanimmediate offspring. Sometimes courts have held that other language inwill or extrinsic circumstances indicate that T in fact meant descendants.

*

*Gift to *A*issue of A*@*. (pg. 792-793)*

*

If the issue take per capita--all issue born before the period of

distribution take an equal share

**

per stirpes or by right of representation--children of the child of thedesignated ancestor take nothing if their parent is alive, & if theparent is dead, the children take from the donor by representation

*

*strict per stirpes--divides descendant*=*s property into as many sharesas there are children of the descendant *

*

modern per stirpes--dividing property into shares at generational levelwhere a descendant is alive

*

*

UPC - per capita at each generation

R1 - per stirpes or by right of representation, given meaning as

representation has under intestacy statutes of particular jurisdiction

R2- use word issue without anything else, means use UPC per capita withrepresentation-- but use issue per stirpes use strict per stirpe.

UPC then issue or issue by representation means intestacy law else perstirpes equal strict per stirpes.


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Adopted Children

*

*In most states, adopted children presumptively included in gifts by Tto *A*children*@*, *A*issue*@*, *A*descendants*@*, & *A*heirs*@*of A.But law of these states likely to have been developed by changingjudicial decisions & statutes over 20th century, &, since change may notbe retroactive, whether adopted child is included may depend on what lawwas at T*=*s death in, say, 1955.*

*//

/Minary v. Citizens Fidelity Bank & Trust Co/ (1967)

*

*Trust where income to H & 3 sons with trust to terminate upon death oflast surviving B. Upon termination *A*distributed to my then survivingheirs, according to law of descent & distribution then in force in Ky.*@

*

H dies, one son dies, & another dies leaving 2 kids. Third son adopts

wife to fall within class.

Court does not allow--adoption of an adult for purpose of bringing thatperson under the provisions of a preexisting testamentary instrumentwhen he clearly was not intended to be so favored should not be permitted.

Cases split whether adult adoptees are included within class giftterminology for purpose of will & trust disposition.

R2 provides that a gift to children of A does not include a child of Aadopted by another, if such adoption removes the child from the broaderfamily circle of the designated person.

Absent expression of a contrary intent by the testator, the termchildren is presume not to include stepchildren or persons related onlyby affinity.

Adoption, unlike marriage, is NOT revocable if relationship turns sour.

Nonmarital Children

Nonmarital children take same as marital children. Term lawful issueincludes generally nonmarital children.

Lawyers drafting wills often define words in order to avoid ambiguity.

Gift to Heirs

//

/Estate of Woodworth/ (1993)


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*

*

UPC abolishes doctrine of worthier title and R2 states that doctrineexists in states where not specifically abolished.

Rule in Shelley=s Case

*

*Conveyance to A for life, remainder to A*=*s heirs*

*

Remainder becomes remainder in fee simple to A. Have merger here therebycreating fee simple absolute in A.

*

*Not fee simple absolute where to A for life, then B for life, then toA*=*s heirs.*

**

*Rule in Shelley*=*s case has been abolished in practically all states.In some states the abolition by statute is fairly recent & does NOTapply retroactively. In these states, cases involving the rule continueto crop up from time to time.*

*

Decrease in Class Membership: Death of One of Several Life Bs

*

*Usually people in class have common characteristic. If have O grantBlackacre to A, B & C--tenants in common. If A predeceases O, interestfalls into residuary clause & B & C take 1/3 each. But if members ofclass, where one member predeceases T, other members succeed by right ofsurvivorship. B & C take *2*each.*

*

Assume no antilapse statute applies.

//

/Dewire v. Haveles/ (1989)

T survived by W, S & 3 grandkids (A, B, & C).

*

*Income to W for life, then Son , the widow of son & his children. *A*21


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years after the death of the last surviving child of son, property oftrust shall be equally divided amongst the lineal descendants of mygrandchildren.*@

*

Son had 3 more kids by W2 (X,Y & Z.) Son dies leaving only 6 kids. Thenone kid dies leaving W & child.

*

*Issue: Who takes dead grandchild*=*s interest? other grandchildren ordeceased grandchild*=*s child?*

**

*RAP--violated. May not vest until 21 years after a life in being atdeath of T, as grandkids were born after T*=*s death.*

*

This is a vested remainder in grandkids subject to open & does not closeuntil dad dies. They will all vest during life of son/dad. Butdescendants of A,B,C,X,Y & Z will not be determined within 21 years of

life in being if X, Y, or Z are last grandchild surviving.

*

*Court adopted a wait & see policy stating that question decided atdeath of last grandchild, when class gift of income from the trust willterminate. (Note: Common law is to strike the provision--& would go backto T*=*s estate.)*

**

*Language providing for such distribution may properly be considered indetermining T*=*s intention with respect to others of his will. Find

intent in what T intended to be done during 21 years between when vested& principal paid, T must have intended descendants to receive incomeduring that period, so would intend that descendants of deceasedgrandchild would get their income.*

*

_____

*

*When giving income to class of persons, do NOT dispose of principalupon death of survivor. Instead, say *A*upon death of each life

tenant*@*& go on to provide what is to be done with the individual lifetenant*=*s share.*

*

Increase in Class Membership: Class-closing Rule

O to A then to children of B

*


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*Class gift to children of B--when does it close? upon A*=*s death orB*=*s death (physiologically closed)?*

*

Rule of convenience--class closes when any member of class can demandpossession, with full distribution to the present children & theexclusion of all children later born to B.

Immediate gift

*

*Where there is immediate gift to class, class closes as soon as anymember can demanded possession, either at T*=*s death or later.*

**

*Exception to this rule: if no member of class has been born beforeT*=*s death. Since T must have known there were no class members aliveat his death, it is assumed T intended all class members, whenever born,

to share. Class does not close until death of the designated ancestor ofclass.*

**

*T bequeaths $10K to children of B who reach 21. B has children alive,but no child is 21 at T*=*s death. Cass closes when a child of B reaches21.*

**

*T bequeath*=*s $15K to children of B who reach 21. At T*=*s death, Bhas 2 children under 21. 3 years later E is born to B. *

*

Thereafter C reaches 21--class closes (C entitled to possession) & Cgets 1/3.

F is now born to B--F is outside of class & takes nothing.

*

*D dies before turning 21--his share divided & C get *2*& other *2*keptto see if D lives.*

*

Postponed gift

If gift is postponed in possession until a life tenant dies, class doesNOT close under class-closing rule until time of taking possession. Giftto a class of remainderman does NOT close until life tenant dead, & doesnot close under rule of convenience unless one remainderman is entitled


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to possession.

Gift of income, when class closes does not matter. Class size canincrease or decrease until principal paid out.

Note: Use whichever comes first--close physiology or rule of convenience.

Gifts of specific sums

If specific sum is given to each member of class, class closes at deathof T regardless of whether any members of the class are then alive.

//

/Lux v. Lux/ (1972)

T creates trust for benefit of grandchildren & real estate shall not besold until youngest of grandkids are 21.

T survived by one son & 5 grandchildren. Son testifies intent to havemore children.

Distribution of trust corpus shall be made /at any time/ when youngestof then living grandchildren has attained the age of 21.

*

*Latest time this class could close is upon death of T*=*s son. Butcourt opts for closing at above time --even though all kids could reach21 & then mom & pop have another kid--that child will not take.*

*

Rule Against Perpetuities

Rule: No interest [in real or personal property] is good unless it mustvest, if at all, not later than 21 years after some life in being at thecreation of the interests.

*

*Rule limits time during which property can be made subject tocontingent interests to *A*lives in being plus 21 years.*@

*

Rule prohibits only those interests that may remain contingent beyondperpetuities period.

All legal & equitable interests in property created in transfereessubject to RAP. All remainders & executory interests come within ambitof RAP. Future interests retained by the transferor--reversions,possibilities of reverter, & rights of entry--are NOT subject to RAP.

Donee MUST prove interest vests within perpetuity period.


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RAP is rule of logical proof. Donee of an interest must prove thatinterest will either vest upon creation or vest or fail thereafterwithin 21 years after death of living persons who can affect vesting ofthe interest (known as relevant lives.) If interest will not necessarilyvest or fail within this period, it is void at the outset.

*

*Inquiries: to pay income to A for life, then to A*=*s children fortheir lives, then to pay principal to B.*

*

what are lives in being? A & B

*

*what is contingency? children*=*s life estate--but it vests at the timeof creation. *

*

Validating life or lives must be in being when perpetuities periodstarts to run. Generally, perpetuities period begins when instrumenttakes effect:

*****

*- created by will, validating life or lives must be in being at T*=*sdeath.*

*

- created by deed or irrevocable trust, validating life/lives must bepersons in being when deed/trust takes effect.

- created by inter vivos trust revocable by settlor alone, validatinglife/lives must be persons in being when the power to revoke terminates.

*

**

**

*Find a validating life, if you find one at all, only among persons whocan affect vesting. Test each of these relevant persons to see ifinterest will vest or fail during person*=*s life or within 21 yearsafter that person*=*s death. If there is no person among the relevantlives by whom the requisite proof can be made, interest is void unlessit must vest or fail within 21 years.*

*


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Requirement of No Possibility of Remote Vesting

Female Octogenarian

Female octogenarian usually appears in a 2-generation trust.

***

*T bequeaths a fund in trust for her sister *A*A (age 80) for life, thenfor A*=*s children for their lives, then to distribute the trust assetsto A*=*s grandchildren.*@

*

*

**

*Law conclusively presumes that A is capable of having more children.

Due to this assumption, the secondary remainder to A*=*s children fortheir lives may include an afterborn child of A, & the remainder ofA*=*s grandchildren might vest on the death of this afterborn child,which is too remote. Remainder to A*=*s grandchildren is void.*

*

A has child B who has child C when T dies.

Relevant lives are A, B, & C.

A - life estate

*

*B - vested remainder life estate subject to open (class closes at A*=*sdeath)*

*

C - vested remainder subject to open (closes when last child of Adies--so if after born children could close 21 years after a life in being.)

A few states have statutes limiting the presumption of fertility inperpetuities cases to statistically significant child-bearing years orpermitting the introduction in any case of evidence of capacity to bearchildren.

The Unborn Widow

//


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/Dickerson v. Union National Bank of Little Rock/ (1980)

*

*To M for life, to M*=*s widow for life, then principal to children of M.*

*

Lives in being: M, current wife & current children at time

M - life estate

*

*M*=*s widow - contingent remainder life estate (contingent on surviving M)*

*

Heirs of M - contingent remainder upon being an heir of M (surviving todeath of M)

Problem where M remarries and new wife was not a life in being when Tdied. If

Documents

Trusts OL - Follows Dukeminier