Creating a Trust

A revocable living trust, a popular will substitute, is a great way to avoid probate. A revocable living trust is a trust that was created and took effect during the settlor's life. However, sometimes a settlor wants to create a trust and have it take effect after his or her death. These are testamentary trusts, and will be subject to probate.

Creation of a private trust
A trust is a fiduciary relationship with respect to property whereby one person, the trustee, holds legal title for the benefit of another, the beneficiary, and which arises out of a manifestation of intent to create it for a legal purpose.

There are 4 requirements to create a private trust: (1) intent to create a trust, (2) "res" (or trust property), and (3) ascertainable beneficiaries. (4) legal purpose. Trustee is required but the trust wont fail for lack of a trustee.

Intent to create a trust
There must be a present manifestation of intent made by the settlor. You can't intend for the trust to arise later. No words are necessary, but if settlor (creator) says or writes the words “trust” or “trustee,” then an intent to create a trust is presumed. Intent to create a trust exists anytime one party transfers property to another party with (a) the intent to vest beneficial interest in a third party (equitable ownership to beneficiary) and (b) the intent to transfer legal interest to the trustee (intent to split legal ownership from beneficial interest).

Precatory expressions do NOT give rise to an intent to create a trust. When the decedent expresses merely a hope, wish or suggestion that the property be used for a certain purpose, courts generally hold that no trust was intended, only that the transferor wished his desire to be known so the transferee can comply if willing. The language isn’t strong enough to create a trust. But precatory words plus parole evidence (prior action) may give rise to an intent to create a trust.

You can have an oral trust for private property. Must be in writing if it involves real property.

"Res" (trust property)
The second element requires (1) an act of funding and (2) a property interest that will qualify as adequate property interest for purposes of funding the trust. The one exception to the funding requirement is pour over trusts.

Things that will fund a trust: fee simple absolute, future interest (contingency remainders), life insurance policy, bonds, or stocks.

Things that won't fund a trust: future profits of a business, a debt, a mere expectancy (what the settlor expects to inherit as a gift).

Ascertainable beneficiaries
Beneficiaries must be ascertainable. You must be able to objectively identify the beneficiaries by name. If the name is not provided the trust, it must contain a formula or a description of the beneficiary that permits the court to determine by objective means who they are. The term “friends” is not objectively ascertainable. The term “relatives” is ascertainable because the court can use the law of intestate succession to identify. "Pets" are not ascertainable beneficiaries (but it might be upheld as an honorary trust).

Corporations can be the beneficiary of a private express trust. Class gifts are valid, but a class can be too big. California is too big.

A child conceived when the interest was created and born later is an ascertainable person but watch for RAP. For example: O converys to the bank in trust, "to A but if liquor is ever sold, then to B." B's interest is void against RAP.

The trust must be created for a legal purpose
What if the trust is for an illegal purpose or is against public policy?

Illegality at creation
Court will try to exise the bad from the good. For example, if the settlor created a trust for Abe on the condition that Abe divorse his spouse, then such trust violates public policy and the court will exise the condition, and Abe takes free and clear of the condition. If it's not possible to exise, then the court will invalidate the trust at its inception. For example, if the settlor created the trust to defraud settlor's creditors, then the court can invalidate the whole trust so the creditors can attach assets. Another option is to allow the trustee to keep the property for himself or herself as punishment against the settlor who has unclean hands.

Illegality after creation
If a trust becomes illegal after creation, a "resulting trust" is decreed in favor of the settlor or the settlor's estate/heirs.

Categorizing trusts according to when it was created: during lifetime or after death?
Express living trust (revocable living trust)
Living trusts are dreated during life of the settlor. There are 2 ways to create a living trust: (1) but declaration of trust or (2) by deed.

The most popular way is through a declaration of trust. The settlor declares him or herself to be trustee of the specific property orally or in writing. If it involves real property, it must be in writing.

The second way to create a living trust is through a deed or transfer of trust. These must always be in writing. You write that you will make a third person a trustee of your property. Then, you transfer by deed your property into a trust and you declare X to be the trustee. There is an extra formality: the deed must be delivered (by delivering the trust property to the trustee or by delivering the deed itself). Moreover, a promise to deliver in the future will not give rise to a trust.

The key difference is that with declaration of trust, you make yourself the trustee, but with a deed of trust, a third person is trustee.

Testamentary trust
These are created by a will and do not avoid probate. The settlor writes in his or her will, something like: “I give $10,000 in trust to Y when I die for the benefit of A during life and upon A’s death to B.” It is the language in the will that creates the trust. It could be in the will or codicil.

The testamentary trust is to be distinguished from a pour over trust. If you have a will that pours your assets into your trust, this is NOT a testamentary trust. It’s a living trust because the actual trust is established when you are alive and all that the will does is pour over assets into the living trust.

Constructive trust
This is not a real trust. This is a type of restitution remedy to prevent unjust enrichement. Wrongdoer has one obligation: transfer the property to the intended beneficiary as determined by the court. A constructive trust is a means to disgorge a wrongdoer of ill-gotten gains. There are 4 situations a constructive trust can arise:

1. When a trustee of a private trust or charitable trust makes a profit because of self-dealing. Trustee will have to turn these profits over to the beneficiary.
   
2. Law of wills: there is fraud in the inducement or undue influence. Court will deny probate and makea the wrongdoer give the property to the intended beneficiary.
   
3. Secret trust in the law of wills: will facially gives a gift to A but the gift is really given on the basis of a promise by A to use the money for the benefit of B. After the court allows parole evidence to show the true beneficiary, B, the court will impose a constructive trust and make A transfer the property to B.
   
4. Oral real estate trusts. For example, a mom transfer property to son because she learns she has cancer. S on orally promised to give property back if and when the mom recovers, but son ends up keeping the property even though the mom recovered successfully. Most judges will create a constructive trust ordering the son to put the property in the constructive trust for the benefit of the mom. This requires (1) a confidential relationship, (2) a promise, (3) a transfer in reliance on the promise, (4) unjust enrichment, and (5) the transferor must have clean hands. The transaction can’t have been made for an improper purposes (i.e fraudulent conveyance to avoid creditors).

Things that look like trusts but aren’t really trusts
Honorary trust
These are set up for a particular purpose or goal. An honorary trust has no ascertainable beneficiaries and confers no substantial benefit to society. For example, a trust to further fox hunting, or leaving money behind for a pet Rover so he can be taken care of after the pet owner’s death. You can’t name a dog as a beneficiary, but if the purpose is honorable and not illegal the court may, at its discretion, qualify the arrangement as an honorary trust. If the trustee refuses to serve, it results in a "resulting trust." There are RAP problems with honorary trusts because there is no measuring life. Some courts allow the trust for 21 years and then a resulting trust follows

Totton Trust (Totton Account)
A Totton Trust is a bank account trust where the named beneficiary takes whatever is left in the account at the death of the owner of the account. This is not a true trust because the depositor / trustee owns the account during the depositor's life and owes the named beneficiary no fiduciary duties. It's just a will substitute. An example: "Mary Smith as trustee for John Jones." Mary is the settlor/depositor and she has full contorl during her life. She does not owe John any fiduciary duty. John takes whatever is left upon Mary's death.

The issue is whether the settlor in a Totton account did something during her life to elevate this lowly Totton Account into a full-blown private express trust with the full range of fiduciary duties. Courts will look to the action of the depositor / trustee for a manifestation of trust intent. No magic words are needed to create a private express trust, but if Mary told John "I have created this trust for you" then Mary has manifested an intent to create a trust and elevated this Totton account into a private express trust with a full range of fiduciary duties.

Resulting trust
This is a type of restitution remedy in case a trust fails. The assets go back to the settlor or the settlor's estate. There are 7 situations where a resulting trust is created.

1. The trust ends by its own terms and there is no provision indicating what happens to the corpus thereafter. Ex: settlor creates a trust to enable son to get her law school education. What happens when the son gets get law school education? Corpus goes back to the settlor after the son got his law school education.
   
2. The trust fails because there is no beneficiary. The trust says “to A for life then to B” When A died, B is dead. Thus, trust failed, and as a result, the judge will create a resulting trust.
3. When a chairtable trust ends because of impossibility and Cy Pres can't be used.
4. When a private express trust fails because after creation, the trust becomes illegal.
   
5. When there is excess corpus in a private express trust.
   
6. When we have a purchase money resulting trust (PMRT) (see below).
7. Semi-secret trusts (see below).
   

Purchase money resulting trust (PMRT)
This is a type of remedy giving property back to the person who paid for property when a trust fails (if you purchase property and take it in the name of someone who isn’t the natural object of your bounty). This raises a presumption that it should go back to the settlor. For example, if you buy land and you put title in the bank’s name, the bank isn’t the natural object of your bounty. The presumption arises that this is a PMRT and unless rebutted it reverts to settlor. The reason someone may put title in bank’s name is because you want the bank to be trustee. The problem is that if the trust fails for some reason, we need a way to get trust back to the original owner. Mechanism for this is a PMRT.

Secret and Semi-secret trusts
Remember that testamentary trusts are created in a will and must be in writing to comply with the Wills Act formalities. Where testamentary trusts fail for lack of a writing, the issue is whether relief should be a constructive trust or a resulting trust. This depends on whether the failed testamentary trust is a "secret trust" or a "semi-secret trust."

A semi-secret trust is invalid and results in a resulting trust. The assets revert back to the settlor. There is something in the express language of the will hints that this devisee was not intended too take the property for his own benefit (evidence of an oral agreement). No extrinsic evidence is necessary to realize that the devisee was not intended to take beneficial interest so no extrinsic evidence is allowed. For example, a provision in a will says “to RW with oral instruction for benefit of X.” It’s semi-secret because we know that the testator doesn’t intend this to be an outright gift to RW, but we don’t know what the conditions are. How can you fix semi-secret trusts and save the trust? Through integration by reference.

With a secret trust nothing on the face of the will indicates that the testator intended the devisee to take the property as trustee. If there is extrinsic evidence that the devisee was supposed to take as trustee not devisee, the court uses extrinsic evidence to impose a constructive trust on the devisee, ordering devisee to transfer property to intended beneficiaries. The probate court will order assets go to the devisee. If the devisee misuses the funds, intended beneficiary can go to court of equity and request a constructive trust.

Remember that in a "resulting trust," the gift fails and proceeds fall back to the residue and it goes to residuary legatee. In a constructive trust, the proceeds go to the intended beneficiaries.

A minority approach imposes a constructive trust in favor of intended beneficiaries for both secret and semi-secret trusts.

For example, assume a couple has 2 children. The younger son is a drug-user and has been in a lot of trouble. The older son is living a productive life. Would it be fair to leave the entire estate to the older son with a verbal agreement that he make decisions in the best interest of the younger brother? Parents could leave the estate to the older son on the condition that he give $1,000 per month to the younger son. This is an equitable charge.

The parents could put in the will “we leave our estate our older son pursuant to the agreement we made with him about our younger son.” This is a "semi-secret trust" and it would be invalid. The consequence of a semi-secret trust is a "resulting trust" where the assets to back to the parents. The estate would fall into the residue.

So how can this be saved? Integration by reference. If you can do this, then you are ok and the written agreement becomes part of the text of the will.

Equitable charge
An equitable charge is a clause in the will. It isn’t a trust, but it simply creates a debt. An equitable charge gives property to someone subject to a particular duty to someone else. A recipient has a duty to someone else (usually to give them a sum of money). If the person doesn’t perform the duty to that person, then the other person can sue them for that debt.

For example “I give my farm to my daughter and my daughter is to pay my son $10,000 per year.” This raises the question of who owns the farm? One possibility is that the daughter owns the farm outright subject to an obligation that she pay $10,000 per year to her brother. This is an equitable charge. Another possibility is that she is trustee of the farm holding her for her brother as the beneficiary.

There is real a difference between the two possibilities. If the daughter is trustee only, she has fiduciary duties to her broother and he can sue if she didn’t fulfill her duty as trustee. But if this is an equitable charge, then he can only sue to enforce the debt.

Categorizing trusts according to how it distributes money:
Mandatory trust
The trustee must pay all the income (but not principal). The trustee has no discretion as to how much of the income to pay or who to pay income to. The beneficiary has a right to receive it and can sue if its not being paid. Because the beneficiary is entitled to receive income, creditors can get access to beneficiary’s mandatory payments. If there is a mandatory trust with more than 1 person as income beneficiaries, then assume each get an even share unless the settlor specified proportions.

The most common arrangement is mandatory as to income and discretionary as to principal.

Can the beneficiary assign or sell their mandatory right to income to a third party for a lump payment? Yes. This was a problem for wealthy children so lawyers came up with spendthrift trusts, also called a disabling restraint (see below)

Unitrust
The income depends on how the market is doing. The unitrust is a variation of a mandatory trust. The trustee must pay a percentage of the corpus. The income becomes part of the corpus and in intervals, a percentage of the principal is paid to the beneficiary. This is still mandatory. It's the trustee's job to measure the percentage and pay that specific percentage out.

*Discretionary trust*
In a discretionary trust, the trustee doesn’t have to pay the beneficiary income or principal. The trustee has sole and absolute discretion in determining how much to pay the beneficiary, if anything, and when to pay the beneficiary, if ever. Unless the trustee has “abused its discretion,” the income beneficiary cannot sue the trustee. Beneficiary has no right to receive income.

1. Can the beneficiary transfer his right to payment? One one hand, no because the beneficiary may not get anything. On the other hand, if there was an assignment, the assignee steps into the shoes of the beneficiary. Because the beneficiary could not force payment by the trustee, neither can the assignee.
   
2. Can creditors attach? Generally, discretionary payments are protected from creditors. However, some states allow creditors to collect up to 25% of discretionary payment if the trustee has notice of the debt and the trustee decides to pay.
   

Spray or "sprinkle" trust
This is a hybrid between a mandatory and discretionary trust. All the income must be paid to the income beneficiaries (mandatory). However, the trustee can decide how much income to give different beneficiaries (discretionary). If one child has greater need than another, then the trustee can give more to that child.

*Spend thrift trusts or provision*
A spend thrift trust is one where the beneficiary cannot transfer his right to future payments or income or principal and creditors cannot attach the beneficiaries right. To be effective, it must disable both voluntary and involuntary alienation. A provision in the trust will say that the beneficiary cannot assign or sell his or her interest and creditors cannot reach it:

"No beneficiary of this trust shall be allowed to voluntarily transefr his right to future payment, and no creditor shall be allowed to attach any beneficiary right to future payment."

3 testable issues:

1. Can the beneficiary voluntarily alienate his rights under the trust? No.
   
2. Can creditors attach the beneficiaries rights under the trust? Generally no, but there are exceptions for preferred creditors: a child or ex-spouse for child support or alimony, government (IRS), felony tort creditors (in California), or providers of necessities. Spend thrift trusts, however, are successful in protecting assets against bankruptcy creditors, ordinary tort creditors and ordinary contract creditors.
3. Can the settlor create a spendthrift trust for himself? These are called "self-settled trusts." Most states say no, but a minority of states, Alaska and Delaware, will allow you to set up self-settled asset protected trust, but generally you cannot do this to avoid an existing debt. But if you are a doctor and you want to prevent assets from malpractice that might arise in the future then perhaps you can set up a self-settled trust in Alaska or Delaware.
   

Support trust (type of discretionary trust)
The trustee is required to use only so much of the income or principal as is necessary for the beneficiary's health, support, maintenance and education. No more and no less. The trustee must figure out how much the beneficiary needs for her comfortable maintenance and support. A trust may look like a support trust, but often it's not. Almost every trust talks about support and well being, but this doesn’t make it a support trust. A support trust can only be used for support, and the beneficiary can only sue to get enough money as is needed for support.

1. Can the beneficiary voluntarily alienate or transfer her right to future payment under the support trust? No.
   
2. Can creditors attach the beneficary's right to future payment? Generally no, but preferred creditors can. Support trusts are accessible by creditors, but because the only interest the beneficiary has is one for support, the only creditors who can go after a support trust are those who provide necessities.

Creditors rights
In most states, including California, to the extent that the settlor could have revoked in his/her life, a creditor of settlor after the settlor’s death may reach the trust assets.

Example of trust language

"I the undersigned having purchased 100 shares of stock in X corp and having directed that the certificate of said stock be issued in my name as trustee for Richard Williams as beneficiary, do hereby declare that the terms and conditions upon which I shall hold said stock in trust are as follows: (1) during my life all cash dividends are to be paid to me individually, (2) upon my death the title to any stock subject hereto and the right to any subsequent payments or distributions shall be vested absolutely in the beneficiary."

This is a living trust created by a declaration of trust. This is revocable in California because it did not indicate revocability

"I give, devise, and bequeath all of the rest and residue of my estate… unto my son, Frederick Baugh and First National Bank, the survivor of them and their successors, as Trustee, in trust and confidence; nevertheless, for the following uses and purposes: My trustees shall pay from time to time the net income and so much of the principal as they, in their absolute and uncontrolled discretion, may determine, to my daughter Ashley Baugh, or in their absolute and uncontrolled discretion, may apply the same for her maintenance, comfort and support."

This is a testamentary trust mandatory as to income and discretionary as to principal.

"I hereby order and direct my said nephew, Pasquale Guiliano, to expend at lease $5,000 and no more than $10,000 for the erection of a mausoleum which shall contain at least 6 compartments."

Honorary trust set up for a definite purpose.

"I hereby give, bequath, and devise to my niece, Susan Howell, all shares of stock in Brach Homes, Inc subject to the oral agreement made by me with Faris Sykes as follows: that Brach Homes shall pay unto Faris Sykes for the remainder of his natural life, the amt of annual salary he is currently receiving at the time of my death, and the amt of life insurance premiums upon his life which are currently being paid at the time of my death. This devise in this Article is subject to compliance with the aforesaid agreement."

Equitable charge. The oral agreement is just a red herring: the text tells us the terms of the oral agreement.

"I give to J.O. Wiek of Tacoma, Washington my work bench, tools and guns, and I authorize J.O. Wiek to dispose of the rest of my belongings in such manner as I shall have discussed w/him prior to my death OR in such manner as I may instruct him by letter. My co-executors are to rely completely on the direction of J.O. Wiek in disposing all of the remaining items."

Semi-secret trust. Resulting trust back to the settlor (trust fails).

"I give to J.O. Wiek of Tacoma, Washington my work bench, tools and guns and other personal belongings." (Mr. Weik has promised me that he will distribute the money in such manner as I have expressed to him).

Secret trust.

"No interest in the principal or income of this trust shall be anticipated, assigned, encumbered, or subject to any creditor’s claims or to legal process, prior to its actual receipt by the beneficiary."

Spendthrift clause

If my sister, Rose Williams, shall survive me, I direct that my trustees shall use as much of said income as is necessary for the support and maintenance of my said sister at Stony Lodge Sanitarium in Ossing, NY.

Support trust.

"I give, devise, and bequeath all the rest, residue and remainder of my estate, whatever the situation, to the trustees under a Trust Agreement dated November 12, 1979, which I signed with my wife, Yoko Ono, and Eli Garner as trustee, to be added to the trust property and held and distributed in accordance with the terms of that agreement and in any amendments made pursuant to its terms before my death."

Pour over provision.

"My trustee is authorized to accumulate the net income or to pay or apply so much of the net income and such portion of the principal at any time and from time to time for the health, education, support, and comfortable maintenance and welfare of (1) my daughter Lisa Marie Presley and any other lawful issue I may have, (2) my grandmother, Minnie Mae Presley, (3) my father, Vernon Presley, and (4) such other relatives of mine living at the time of my death who in the absolute discretion of my trustees are in need of emergency assistance."

Discretionary trust.