19.44 Trust And Trustees

19.44.1

In General

A trust is a relationship between individuals and the holding of assets. In a trust relationship, one individual or entity holds legal title to the property of another for the benefit of that person or a third person. Perhaps the simplest explanation of a trust is the following: A conveys his property to B for the benefit of C. A, the person who conveys the property and creates the trust is called the settlor. B, the individual or entity given control over the property is called the trustee. Technically, the trustee becomes the legal owner of the property transferred into the trust. C, the person for whose benefit the property is held, is known as the beneficiary of the trust. The rules governing the trustee's power and authority to deal with the trust property are usually set forth in a formal written agreement between the settlor and the trustee known as a trust agreement. If the trust is to become operative during the lifetime of the settlor, it is known as an intervivos trust or living trust. If the trust agreement is embodied in the settlor's will, and thus does not become operative until after the settlor's death, the trust is known as a testamentary trust. Title to land held in a trust by a trustee becomes a concern of the title examiner because the trustee's power and authority to deal with the property may be limited by the terms of the trust agreement between the trustee and the settlor.

19.44.2

Parties To A Trust

Trustor

The creator of the trust. A person who creates a trust by transferring title to real or personal property to a trustee under an agreement that the trustee will administer it for the benefit of another (the beneficiary). Also referred to as the settlor, donor, founder, or creator.

Trustee

The person or legal entity holding title to real or personal property under an agreement for the benefit of another (the beneficiary).

Beneficiary

A person for whose benefit a trust is created and who is entitled to the benefits of the trust; someone possessed of the enjoyment of property, the title to which is vested in the trustee. Also referred to as the cestui que trust.

19.44.3

Capacity Of The Trustor

Anyone competent to contract may make such disposition of the legal title to his property as he pleases, may annex such conditions and limitations as he chooses, and may vest it in the trustees for the purpose of carrying out his intention.

19.44.4

Intention To Create A Trust

A valid trust employs definite language to indicate the settlor's intention to create a trust, the subject of the trust, and the object or persons intended to have the benefit of the trust.

19.44.5

Classification Of Trusts

Active Trust

A trust under which the trustee has active duties to manage or handle the corpus of the trust. This type of trust is distinguished from a dry or passive trust.

Blind Trust

A blind trust arises where property is conveyed or transferred to a trustee but the conveyance or transfer does not disclose the trust or identify the beneficiaries. When title to property is held in this manner, the trustee may convey, transfer or encumber the title of the property and persons dealing with the trustee do not have to inquire about any trust agreement and do not require proof of the trustee's authority. If the settlor of the blind trust holds public office, the trusee can invest and manage theproperty without the public official's knowledge of how it is invested, allowing him or her to avoid accusations of conflicts of interest.

Charitable Trusts

A trust designed for the benefit of a class in particular or the public in general. As a general rule the individuals who may benefit are indefinite in number and uncertain.

Complete Voluntary Trust

A trust completely created. The subject matter is designated, the trustee and beneficiary are named, and the limitations and trusts are fully and perfectly declared.

Constructive Trust

A trust which arises entirely by construction of law or by operation of law, independently of any actual or presumed intention of the parties, and often contrary to their intention, for the purpose of promoting justice or for frustrating fraud.

Contingent trust

A trust that depends for its creation and operation on the happening of a future event.

Conventional Trust

A trust created by decree of a court of competent jurisdiction.

Delaware Statutory Trust

In 1998, the Delaware Business Trust Act became law. In 2002, the name of the act of changed to Delaware Statutory Trust Act (DST Act). This law was designed to bypass the principles of common law trusts that created a disadvantage to trust holders. The DST Act was also written to include new provisions that provided increased contract freedom between trustee and trustor. This increased freedom covered the liabilities and types of administration of the trust.

The following is a portion of the Delaware law:

(i) Except to the extent otherwise provided in the governing instrument of a statutory trust, a trustee of a statutory trust has the power and authority to delegate to 1 or more other persons the trustee's rights and powers to manage and control the business and affairs of the statutory trust, including to delegate to agents, officers and employees of the trustee or the statutory trust, and to delegate by management agreement or other agreement with, or otherwise to, other persons. Unless otherwise provided in the governing instrument of a statutory trust, such delegation by a trustee of a statutory trust shall be irrevocable if it states that it is irrevocable. Except to the extent otherwise provided in the governing instrument of a statutory trust, such delegation by a trustee of a statutory trust shall not cause the trustee to cease to be a trustee of the statutory trust or cause the person to whom any such rights and powers have been delegated to be a trustee of the statutory trust.

Direct Trust

An express trust, as distinguished from a constructive or implied trust.

Directory Trust

A trust which is not completely and finally settled by the instrument creating it, and is subject to be molded or applied according to subsequent directions of the grantor.

Discretionary Trust

A discretionary trust is one where, by the terms of the trust, no direction is given as to the manner in which the trust fund shall be vested till the time arrives at which it is to be apportioned in satisfaction of the trust.

Donative Trust

A donative trust is a trust not requiring payment of any consideration by the beneficiary. Such a trust may be created by transfer of property in trust as a gift for the benefit of another person or by declaration of the owner of property that he will hold it in trust for another's benefit. Where such a trust is created, the law of trusts is superimposed on the law of gifts or the law of wills.

Dry Trust

A trust in which the trustee is a mere passive depository of the legal title to the property, with no active duties to perform. This kind of trust is also known as passive, simple, technical, or naked trust.

Enforceable Trust

A trust in which some person or class of persons have a right to all or a part of a designated fund, and can demand its conveyance to them.

Executed Trust

The terms and limitation of an executed trust are definite and completely declared by the instrument creating it.

Executory Trust

A trust in which the limitation are not completely declared, the settlor's intention being expressed only in general terms, and something remains to be done by the trustee, usually, the execution of some further instrument.

Express Trust

An express trust is created by the direct and positive act of the donor or settlor, by some writing, deed or will, as distinguished from a trust inferred by the law from the conduct or dealing of the parties.

General Trust

A transfer by a person of all his property to a trustee to hold as a trust fund.

Imperfect Trust

An executory trust.

Implied Trust

A trust that is not expressed, but that is raised or created by implication of law; a trust implied presumed from circumstances.

Inter vivos Trust

A inter vivos (among the living) trust is created and comes into existence during the life of the trustor.

Involuntary Trust

A constructive trust.

Irrevocable Trust

Trust agreement that by its terms cannot be revoked by the settlor.

Massachusetts Or Business Trusts

See "Business Trusts" section 2.28 above.

Ministerial Trusts

A trust which demands no further exercise of reason or understanding than every intelligent agent must necessarily employ; also called instrumental trust. It is a species of special trust, distinguished from a discretionary trust, which necessarily requires much exercise of the understanding.

Naked Trust

A dry or passive trust. A trust which requires no action on the part of the trustee, beyond turning over money or property to the cestui que trust.

Parol Trust

A right to property created without writing by one person for the benefit of another. Sometimes the term is applied to trusts which do not come within the statute of frauds and may be proved by parol evidence. In this sense, resulting trusts are known as parol trusts.

Passive Trust

A dry or naked trust. A trust as to which the trustee has no active duty to perform.

Precatory Trust

A trust created by certain words which are more like a wish or hope that a command or requirement.

Private Trust

A trust in which the beneficial interest is vested absolutely in some individual or individuals, who are or may be definitely ascertainable.

Public Trust

A public trust, also called a charitable trust is one in which the public at large, or some descriptive part of the public, has the beneficial interest.

Revocable Trust

Trust agreement susceptible of being revoked.

Shifting Trust

An express trust which is so settled that it may operate in favor of beneficiaries additional to, or substituted for, those first named, on specified contingencies.

Simple Trust

A simple trust is one which corresponds with the ancient use, and arises where property is simply vested in one person for the use of another. The nature of a simple trust, not being qualified by the settlor, is left to the construction of law.

Spendthrift Trust

A trust created to provide a fund for the maintenance of a beneficiary, and at the same time to secure it against his or her improvidence or incapacity. The trust contains provisions against alienation of the trust fund by the voluntary act of the beneficiary or his or her creditors.

Testamentary Trust

A trust agreement created under the terms and provisions of a valid and uncontested will. The trust becomes effective at the time of the testator's death.

Trust Ex Delicto

A kind of constructive trust imposed because of fraud.

Trust Ex Maleficio

A constructive trust imposed because of some fraud, misconduct, or breach of faith on the part of the person to be charged as trustee. The circumstances render it an equitable necessity that a trust should be implied.

Voluntary Trust

An obligation arising out of the settlor's personal confidence reposed in the trustee, and voluntarily accepted by the trustee one for the benefit of the settlor or another person. A voluntary trust is distinguished from an involuntary trust, which is created by operation of law. Voluntary trusts are sometimes made in favor of a volunteer, a person who gives nothing in exchange for the trust, but receives it as a pure gift. In this use, the term is distinguished from trusts for value in favor of purchasers, mortgagees, etc. A voluntary trust is an equitable gift, and in order to be enforceable by the beneficiaries, must be completed by actual delivery of the corpus to the trustee with the intention of passing title.

19.44.6

Express Trusts

Creation

No particular or technical words are necessary to create an express trust. Any language which shows with reasonable certainty an intention to create a trust, and which designates the property, the beneficiary, and the purpose of the trust, is sufficient. Under the statute of frauds, an express trust must be evidenced by writing.

The most common forms used in the creation of a trust are:

  • Declaration of trust
  • Delivery in trust
  • Conveyance or deed
  • Agreement or Contract
  • Testamentary disposition

After a trust is created and in force, it cannot be amended or altered without the consent of all parties in interest, except under a reserved power of amendment or alteration.

Elements

The basic elements of an express trust are:

  • The Transfer

    The transfer of property can be accomplished by a:

    • Declaration of trust and conveyance
    • Conveyance
    • Will

  • The Trustee

    In general, the trustee can be any person or entity capable of taking legal title. Some statutes require corporation to be vested with specific trust powers, and in some jurisdictions, non-individuals acting as trustees are subject to certain limitations.

    The trustee is generally appointed in the trust agreement. If the trust does not provide the method for the appointment of a successor trustee in the event of death, refusal or inability to act, a court of competent jurisdiction may appoint one.

  • Trust Property (Corpus)

    The subject matter of the trust must be lawful and in existence at the time the trust is created. It can be almost any interest in property. The requirements as to the description of the property conveyed are a matter of conveyancing.

  • Beneficiary

    In the creation of a trust, the beneficiary must be clearly and definitely designated. Any person or legal entity capable of taking an interest in real property may be a trust beneficiary, incliding the settlor. A class, if clearly defined, may be named as a trust beneficiary.

  • Purpose

    Unless prohibited by statute, a trust may be created for any purpose the creator desires, providing it would not be contrary to public policy.

  • Permissible Term

    Unless otherwise provided by statute, the term of the trust cannot be in contravention of the rule against perpetuities. The rule establishes that any created interest must vest within twenty-one years, exclusive of periods of gestation, after lives in being.

    The rule against perpetuities does not apply to charitable trusts.

19.44.7

Separation Of Legal Title And Equitable Ownership In An Express Trust

An express trust, as distinguished from a resulting or a constructive trust, involves the separation of the legal and the beneficial interest in a thing or res, whereby the legal title in the trust is held by a person, the trustee, for the benefit of another, the beneficiary, who has an equitable interest in the res to receive benefits under the terms of the trust.

19.44.8

Testamentary Trusts

When making a will, a person may leave property to a testamentary trust.

The will itself establishes the trust and sets the boundaries of the trustee's authority.

The creation of any testamentary trust depends on:

  • The death of the testator, who is also the settlor or trustor.
  • The validity of the will in which the trust is created. This condition presupposes the completion of the probate proceedings.

In the event that the will is not admitted to probate during the time allowed by law, or if admitted, it is contested and set aside, the trust that was to be created will be of no legal effect.

It should be noted that, though not being a testamentary trust, it is possible for an "intervivos or living trust" (previously created) to be named as a devisee under the terms of a will. Obviously, the devise is subject to the same conditions mentioned.

19.44.9

Statute Of Frauds In Relation To Trusts

The statute of frauds, provides that all trusts in lands shall be manifested and proved by a writing signed by the creator of the trust, or by his last will in writing, or else the trust shall be utterly void. Therefore, in states, where this statute prevails (either as part of the common law or by re-enactment), a trust must be evidenced in writing. The trust does not necessarily have to have been created in writing, but its existence, if denied, must be proved by some writing.

However, in other states, statues provide that trusts in or concerning real property must be created and declared in writing. When a trust is created by will, it is necessary for the will to have been executed and proved in accordance with the applicable state law.

The statue of frauds applies to public, private and charitable trusts, but it does not apply to resulting or constructive trusts.

19.44.10

Powers Of The Trustee

Source of the Trustee's Powers

The trust declaration

The state statutes

Interpretation of Powers

The trust terms may expressly or by implication define the trustee's powers.

Additionally, and when necessary, the law (statutory or decisional) will infer complementary powers from the trust instrument as a whole or from the general law.

Power to Sell, Lease, or Mortgage Real Property

Power of Sale

Normally, the power to sell any trust asset is found in the trust instrument. If not expressly given, the power may be inferred from the trustee's inherent duty to make trust assets productive, unless there is a specific prohibition against a sale. An intention not to sell property can be inferred from the trust instrument or from the surrounding circumstances and the stated purpose of the trust.

In the absence of an express or implied power to sell, a trustee has no power to sell without a court order. Authority to sell or encumber cannot be inferred from a power merely to manage trust property and distribute income.

Company approval must be obtained prior to issuance of a policy based on an implied trust power to sell.

Power to Lease

Normally, a power to lease any trust asset is found in the trust agreement.

All, of the above considerations in relation to power of sale are also applicable to leasing power.

It should be added, that in all lease cases there is a question as to whether the trustee has power to lease any trust asset beyond the period of duration of the trust. In this respect, court opinions seem to be divided.

Power to Encumber

Normally, a trustee does not have power to mortgage any trust asset. Even if a power of sale is given, a power to mortgage is not to be inferred.

Moreover, it is improper for a trustee to acquire property subject to a mortgage in the absence of a specific authorizing provision in the trust document.

19.44.11

The Trustee Dealing With Itself

A trustee cannot, in its fiduciary capacity, deal with itself in its individual capacity.

The trustee cannot take part in any transaction concerning the trust in which the trustee has an interest adverse to that of the trustee's beneficiary without permission of the beneficiary after full disclosure. Neither can the trustee convey or mortgage trust property to itself or to its spouse.

Company approval must be obtained prior to issuance of a policy involving self dealing.

19.44.12

Termination Of A Trust

Where the instrument creating a trust does not prohibit the trust's termination, a trust may be terminated:

  • By agreement of all parties in interest
  • By the concert of the beneficiaries without judicial action
  • By the trustor through the exercise of a previously reserved power of revocation
  • By judicial determination that the trust was improperly created, its purpose is unlawful or it is impossible to be carried out
  • By operation of law
  • By the terms of the trust
  • Expiration of the term or duration
  • Occurrence of some event

19.44.13

Effect Of Termination Of A Trust

The termination of a trust ends the separation of legal title and equitable ownership. The title to the corpus and principal, including accumulations of income, passes to the beneficiaries. It is the duty of the trustee to pay or turn over the estate to them and make a conveyance to them where conveyance is necessary to clear the legal title.

19.44.14

Effect Of Voidance Of A Trust

Where there is a clear intention to create a trust but the trust is void for any reason, either no title passes, or a resulting trust remains in favor of the grantor, since a trustee takes only such estate as is necessary to carry out the trust. But if a consideration passed, then the trustee holds under a resulting trust for the person who paid the consideration.

19.44.15

Recommended Forms Of Vesting Of Title In A Trust

Inter vivos or Living Trusts

__________, trustee under the (declaration of trust) (trust agreement) dated _____, made by ____________, settlor, (for the benefit of _______ ), (and recorded in Book _____ , Page _________.

Testamentary Trusts

_________ , trustee under the trust created by the last will and testament of ______ , deceased, and recorded in Book ________, Page _______.

19.44.16

Examination Of An Intervivos Or Living Trust

When examining an inter vivos or living trust:

  • Is the trust's date clearly defined?
  • Did the settlor or trustor have mental and legal capacity at the time he or she created the trust?
  • Was the trust properly created? Are there any special statutory requirements relative to the creation of a trust?
  • Property or corpus:

    • Did the settlor own the property at the time of the creation of the trust?
    • Did the settlor have fee simple title to the property?
    • How was it conveyed into the trust? Were all the statutory conveyancing requirements or rules complied with?
    • Was the property acquired subsequently by the trustee?
    • Is this a valid conveyance?

  • Was a trustee appointed? Was a co-trustee appointed? Was a successor or contingent trustee appointed?
  • Does the trustee qualify under state law? The co-trustee? The successor or contingent trustee?
  • Are the powers of the trustee express powers? (do not rely on implied powers)
  • Are there prohibitions or limitations in relation to the trustee's powers?
  • If any trustee's power is discretionary, has any successor or contingent trustee been appointed?
  • Is there any possible violation of the rule against perpetuities?
  • Is there any possible violation of the rule against illegal restraint on alienation?
  • The purpose of the trust,

    • Is it illegal?
    • Does it violate public policy?
    • Does it violate state law?

  • Do the beneficiaries qualify as such under state law?
  • Is the trust a charitable trust?
  • Is the trust a dry trust?
  • Has the trust been amended, modified or revoked?
  • Has the trust been terminated? Is it still in force and effect?
  • Does the trust instrument need to be recorded in accordance with state law?
  • Is the trustee executing a lease that will extend beyond the period of duration of the trust? Is this action authorized by the trust instrument?
  • Has the Company been asked to affirmatively insure that the transaction is within the powers of the trustee?
  • Are all the provisions of the trust being complied with?
  • Is it necessary to obtain the consent of the beneficiaries?

19.44.17

Examination Of A Testamentary Trust

In addition to those items set forth at 19.44.16, the following items must be considered when examining a "testamentary trust."

  • When did the testator die?
  • Has the will been admitted to probate?
  • Are the probate proceedings still pending?
  • Has state law been fully complied with in regard to the probate proceedings?
  • Is the property free and clear of taxes, claims, allowances, etc.?
  • Does state law make any special provision in regard to testamentary trust?
  • Has the will been properly recorded?