TEXAS TRUSTS PROFESSOR ZACHARY A. KRAMER

ARIZONA STATE UNIVERSITY O’CONNOR COLLEGE OF LAW

CHAPTER 1: INTRODUCTION TO TRUSTS

• In this segment, we will consider trust basics in two sections:

o The "What’s What?" section o The "Who’s Who?" section

A. What’s What?

Trust

o A trust is a _____________________________________________ for holding and managing property.

Note 1: A trust’s central feature is a bifurcated transfer, whereby a trustee manages property for the benefit of a beneficiary.

Example 1: T-Bone Taylor transfers his stock portfolio to Hank Marducas, in trust, for the benefit of T-Bone’s children, Bonnie and Clyde. In this situation, title has been bifurcated between Hank, who owns the legal interest in the property, and Bonnie and Clyde, who own the equitable interest in the property.

Principal

o The original trust property and any _____________________________________ of that property.

Income

o Money generated by _________________________________________________________.

Revocable Trust

o A revocable trust can be revoked (i.e., ended) _____________________ during the _________________________________.

Irrevocable Trust

o An irrevocable trust usually ________________ be revoked by the settlor. o Quirky Texas: There is a presumption in favor of _________________________________

_______________, unless the trust documents say otherwise.

Mandatory Trust

o In a mandatory trust, the trustee ______________ distribute payments from the trust, i.e., the trustee does not have discretion to make payments.

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Discretionary Trust

o The trustee is given the power to distribute payments _____________________ ___________________________.

Remedial Trust

o Not really a trust; it’s an equitable ___________________ created by operation of law. o Remedial trusts are ____________________ trusts.

Dynasty Trust

o A trust that can continue (i.e. make payments) for 100 years or longer. o Avoids taxes and the Rule Against Perpetuities.

Rule Against Perpetuities (RAP)

o Because future interests are trust components, trusts _______________ subject to RAP.

B. Who’s Who?

Settlor

o The person who __________________________ the trust. o Courts enforce a trust on the basis of the settlor’s ___________________.

Trustee

o The person who is responsible for ____________________________ the trust o Given the bifurcated nature of a trust, a trustee holds _______________________________

to the trust property, which gives the trustee the power to manage the property, e.g., sell/transfer the property, invest, etc.

o A trustee may be an _______________________, bank, or trust ______________________. o A trust will not fail for lack of a trustee.

If a trust doesn’t name a trustee or the named trustee refuses to serve, a court will _____________________ a new trustee, or a majority of the _____________________ ______________________________ may select a new trustee.

Beneficiary

o The person who receives the ____________________ of the trust o Given the bifurcated nature of a trust, a beneficiary holds ____________________________

_______________ to the trust property, which gives the beneficiary the power to ____________________ the trust instrument.

Note 2: A trust can have multiple classes of beneficiaries (e.g., a current beneficiary with a life estate and a future beneficiary with a remainder interest).

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C. Merger

• An individual cannot serve as sole trustee and sole beneficiary of the trust. Do you see why? • The Doctrine of Merger will terminate a trust if the trustee is the sole beneficiary. The person

takes title as fee simple owner of the property that was to be held in trust.

Exam Tip 1: If you get a problem with multiple beneficiaries, this is a good opportunity to define merger and explain that it doesn’t apply to the facts of the problem.

D. Illustrations

Example 2: Husband devises property to Wife in trust to pay the income to Wife for life, and then on Wife’s death the property is to pass to Husband’s children. Although Wife is both trustee and an income beneficiary, the trust is valid because Wife is not the sole beneficiary. Keep in mind that ______________________________________________ have a remainder interest and can bring an action against Wife to enforce her duties as trustee.

Example 3: T-Bone Taylor wants to ensure that after he dies, his beloved Cockapoo, Robert Downey Jr., Jr., is able to maintain his luxurious lifestyle. He creates a trust naming Hank Marducas as trustee, for the benefit of Robert Downey Jr., Jr.

• In most jurisdictions, this would not be a valid trust because Robert Downey Jr., Jr. is not a person. It would fail because of a lack of a beneficiary.

• Quirky Texas: This is a valid trust in Texas. • When would this trust end? When Robert Downy Jr., Jr. dies.

Example 4: T-Bone Taylor transfers a substantial sum to his friend Hank Marducas, in trust, for the benefit of Hank’s children. The terms of the trust say that Hank is to give each of the children $10,000 each year to pay for their schooling until they graduate from college. This is a ______________________ trust because Hank has no discretion.

Who is the settlor? ______________________

The trustee? ______________

The beneficiaries? Hank’s children

Editor's Note 1: The beneficiaries are Hank’s children in the above example.

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CHAPTER 2: EXPRESS TRUSTS

• The settlor expressly indicates the intent to create a trust relationship. • Two kinds of express trusts: the ______________________________________ trust and the

____________________________ trust

A. Private Express Trusts:

• There are ________________ elements in a private express trust:

Intent

o To create a private express trust, a settlor must __________________ to make a gift in trust. o Though not required, trust words will create a presumption in favor of a trust.

Example 5: "In trust" or "for the benefit of"

Watch out!

Oral Trusts are _________________ in Texas Only for personal property The Trustee cannot be the settlor or the beneficiary.

Example 6: In front of his entire family, T-Bone Taylor declares, "I am giving my stamp collection to my wife Charlene, in trust, for the benefit of my best friend Hank Marducas." This is enough to create a valid trust. The oral statement does not need to be supported by a writing.

EXCEPTIONS! Some types of trusts do have to be in writing:

Statute of Frauds: A trust must be made in writing when it is subject to the Statute of Frauds—for instance if the trust transfers _________________________.

Devise: A trust must be in writing if it is created by a will (i.e. a pour-over trust).

• The property is not transferred by the will; it is transferred into a trust that is created by the will.

Editor's Note 2: The lecture states the common-law rule here, but a distinction applies in Texas. In Texas, a pour-over trust can be created after the execution of the will as well as before or simultaneously with its execution.

• Why create a pour-over trust? To avoid _______________________.

Be on the lookout for precatory language. This is language that expresses the donor’s hope or wish that the donee use the property in a certain way.

Example 7: T-Bone transfers $10,000 "to Hank Marducas, my wish being that he will use it to support his children’s educational pursuits." Such precatory words do not create a trust.

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Be on the lookout for ambiguous language. Distinguish between a trust—which involves a beneficial interest—and a gift.

Exam Tip 2: Intent is tested frequently. Ask yourself: Who has the beneficial interest?

Trust Res

o A valid trust cannot exist without ________________________________________________ ____________________________. Even a fractional interest or a future interest will suffice.

An "empty trust" necessarily fails. Also called the "funded trust requirement." Exception: A pour-over trust

• In a pour-over trust, a testator uses his ____________ to distribute assets via trust. • The terms of the trust must be ___________________________ at the time of the

devise. But, there need not be any property in the trust at that time.

Exam Tip 3: Make sure you understand the difference between trusts and debts.

Debts are obligations to pay a sum of money. The recipient can comingle funds.

A trust necessarily involves a segregated source of funds.

o Segregation: Let me emphasize the point. Trust property must be:

_________________________________, and ____________________________________

Trust Purpose

o A valid trust cannot exist without a valid trust purpose.

This is easy to meet: a trust purpose is valid so long as it is ________________________ or contrary to ______________________________________.

o If a term violates law or public policy, it will be stricken from the trust o But: If removal proves fatal, then the trust will fail.

Beneficiaries

o As mentioned in earlier, a valid trust must have an __________________________________ beneficiary, i.e., identifiable by name or by class membership.

Example 8: T-Bone transfers $10,000 "to Hank Marducas, in trust, for the benefit of the members of the Hilly Flats High School Marching Band." This is a valid class of beneficiaries.

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Exception #1: Unborn Children

Example 9: S conveys property to T, in trust, to benefit A for life, then to A’s children. At the time of the trust, A doesn’t have any children.

This is a valid trust even though the remaindermen are not known. We will know who is in the class, if any, when the life estate ends.

Exception #2: Class Gifts

A trust created to benefit a class of beneficiaries is permissible. The class must be ___________________________. There must be some criteria to

determine who—and who is not—a part of the class.

Exception #3: Charitable Trusts:

Charitable trusts do not require an individual ascertainable beneficiary, because charity is a good thing.

B. Charitable Trusts

• It is helpful to think of a charitable trust as a ____________________ express trust.

Charitable Purpose

o A charitable trust must have a charitable purpose. o The following is a non-exhaustive list of charitable purposes:

The relief of __________________________ The advancement of ______________________________ or ______________________ The promotion of _______________________________ Government or municipal purposes Other purposes benefiting the community at large or a particular segment of the

community

Example 10: Richie Rich conveys his estate "to the Cure Tay-Sachs Foundation, in trust, to care for those suffering from Tay-Sachs Disease." Even though a small number of people suffer from Tay-Sachs disease, the trust is nevertheless charitable in nature.

o The modern trend is to validate trusts as charitable, where possible.

Things to Keep in Mind

o No RAP: Charitable trusts are exempt from RAP, which means charitable trust can _________________________________________.

o Cy Pres: Under the cy pres doctrine, a court can modify a trust if the trust’s charitable purpose is no longer possible.

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Example 11: Richie Rich conveys "to the Hilly Flats School of the Arts, in trust, to support the school’s pottery program." Say that because of low enrollment, the school ends its pottery program and replaces it with a graphic design program. Using the cy pres doctrine, the court can modify Rich’s trust to support the school’s new graphic design program.

o General Charitable Purpose: The goal of cy pres is to make the new charitable purpose as near as possible to the original purpose.

Courts accomplish this by identifying a ________________________________________ _________________________________, which paves the way for application of cy pres.

If no new purpose comes close to the original purpose, the trust property will transfer to a resulting trust, and the property will head back to the settlor’s estate.

o Designating a New Charity: If a charity fails—perhaps closes shop or changes its mission—it is possible to designate a new charity.

Look to the trust ____________________________. Does it identify replacement charities?

If not, the settlor (if living) and the trustee can choose a replacement.

o Standing: In Texas, only the settlor and the attorney general have standing to enforce the terms of a charitable trust.

C. Creating an Express Trust (Private or Charitable)

• An express trust can be created either by an ________________________ transfer or by a ___________________________________ transfer.

Inter Vivos Trust: A __________________________ trust, i.e., created during settlor’s life

o Declaration of Trust: The settlor declares him/herself the holder of the property, in trust, for beneficiaries. In this situation, settlor also serves as _______________________.

o Deed of Trust: The trustee executes a deed of trust, conveying the property to a trustee for the benefit of a designated beneficiary. In this situation, the settlor is not ______________.

Testamentary Trust: A trust created according to the terms of a ____________.

o Pour-over Trust: In a will, a testator can direct his/her estate into a trust, so as to avoid the probate process. In such a case, the assets "pour-over" into the trust.

o “Secret” Trusts: If a testamentary trust does not meet the requirements, it may still be valid:

Constructive or “Secret” Trusts: Looks like a testamentary gift, but created in reliance on beneficiary’s promise to hold property for another. The intended beneficiary can testify to the promise.

Resulting or “Semi-Secret” Trusts: If the testator fails to name a beneficiary, the trust fails and the trustee holds title, to be delivered back to the testator’s estate.

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CHAPTER 3: REMEDIAL TRUSTS

A. Basics

• Remedial trusts are a special brand of trusts quite unlike express trusts. • An equitable ____________________ created by operation of law. • Key characteristic: _______________________ in nature • The sole duty of the trustee is to convey the property to the beneficiary or the settlor. • Once that is done, the trust terminates

B. Two Types of Remedial Trusts

• ___________________________ trust and ______________________________ trust

Resulting Trust

o A remedy used when a trust ________________. o The trustee must return the property to the _______________ or settlor’s ______________.

Example 12: Oliver’s will passes property in trust "to Tony to benefit Archer for life, then to Archer’s children." Archer dies without ever having children. What happens to the property? The trust does not fail, but a resulting trust is created. Tony's duty as trustee is to convey the property back to __________________ __________________.

o Why: The goal of the resulting trust is to avoid _________________________ ________________________________.

o Purchase-money resulting trust: This is a situation where person 1 pays the purchase price for a piece of property, but the title is to be taken in person 2’s name. If person 2 is not the natural object of person 1’s bounty (e.g. not a family member or close friend), then a court will create a “purchase-money resulting trust.”

Person 2’s sole job: _______________________________________________________.

o Can a settlor avoid a resulting trust? Create a ______________________ clause to use in the event that the trust fails

Example 13: Same facts as above. Oliver’s will provides that if Archer dies without children, the remaining trust property goes to Henry or Henry’s heirs.

Constructive Trust

o A remedy used to prevent _____________________________________________________ in the event a third party takes advantage of the settlor

o Key characteristic is some kind of wrongful conduct (fraud, etc.)

Example 14: Darcy has been ill for a number of years, suffering from depression and occasional dementia. Seeing an opportunity, her lawyer convinces her to disinherit her beloved children, who are far away and unable to

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visit often, and give her entire estate to him instead. The children successfully challenge the will on the grounds of undue influence, and the will is invalidated. As a remedy, the court will impose a constructive trust, making the lawyer a constructive trustee, holding the property for the benefit of Darcy’s estate. The lawyer has no authority with respect to the property; he can only convey it to Darcy's estate.

o What to look for?

Fraud, Duress, Undue Influence, Breach of a duty, Detrimental reliance by a third party, or Other wrongful conduct

o Look familiar? This is the remedy in cases involving “slayer rules,” where a killer is barred from benefitting from the victim’s estate.

CHAPTER 4: TRUST DISTRIBUTIONS AND CREDITORS’ RIGHTS

A. Three Basic Types of Trust Distributions

Mandatory Distributions

o The trustee has ______________________________________ as to whether he will make a distribution.

o Trust language may include:

"Trustee to pay all income," "Trustee to distribute $1,000 every month," or "Trustee to distribute law school tuition for the next three years"

Discretionary Distributions

o The trustee has ________________________________________________ as to whether he will pay the beneficiary.

o The opposite of a mandatory trust. o Trust language may include:

"Trustee to make payments for the health and care of the beneficiary," or "Trustee to make payments, in her discretion, for the education of the beneficiary"

o Can also have a trust in which some payments are mandatory and some are discretionary

Support Distributions

o The trustee makes distributions to _______________________ the beneficiary. o Trust language may include:

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"Trustee to make distributions for the support of the beneficiary"

o Support is generally discretionary in nature

B. Alienability of Trust Property and a Creditor’s Ability to Reach Trust Property

Basic Rule #1

o A beneficiary’s equitable interest in trust property is ___________________________ ___________________________, unless the trust instrument or a statute limits this right.

o If the beneficiary has the power to freely alienate, then the beneficiary’s creditors can reach the beneficiary’s equitable interest in the trust property.

Example 15: T-Bone devised his estate "to Hank Marducas, in trust, to make a mandatory payment every month to T-Bone’s daughter, Bonnie." As the holder of an equitable interest in the trust, Bonnie can alienate, i.e., transfer, her interest freely. Under Basic Rule 1, when can Bonnie’s creditors reach her interest in the trust? _______________________________________________

Basic Rule #2

o A creditor cannot reach trust principal or income until such amounts become _____________________ to the beneficiary or are subject to the beneficiary’s ___________________.

Example 16: T-Bone executed a deed of trust, conveying his savings "to Hank Marducas, in trust, for the benefit of T-Bone’s daughter, Bonnie." The trust gives Hank full discretion in deciding when to make payments to Bonnie. Under Basic Rule 2, Bonnie’s creditors _______________ reach the trust property until Hank makes a payment.

Asset Protection Trusts

o The settlor can create a variety of asset protection trusts, which _______________ beneficiaries from the claims of their creditors.

Pour-Over Trust: A testator’s assets pass from the testator’s ___________ to a ___________________________________ trust.

Can creditors reach? So long as the trust was executed before or simultaneously with the will, the testator’s creditors __________________ reach the testator’s assets.

Support Trust: The trustee is directed to pay income or principal as necessary to support the beneficiary.

Can creditors reach? Creditors ___________________ reach the trust property because the beneficiary is unable to demand payment.

When, if ever, can creditors reach? Creditors can reach when the trustee ___________ _____________________________.

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Discretionary Trust: The trustee is given complete discretion regarding whether or not to apply payments of income or principal.

Can creditors reach? Creditors _________________ reach trust property because the beneficiary does not have power to demand payment.

When, if ever, can creditors reach? Creditors can attach when the trustee ___________ _______________________________.

Spendthrift Trust: Expressly restricts the beneficiary’s power to __________________ her interest. The central idea of a spendthrift trust is some beneficiaries need to be protected from _________________________________.

Can creditors reach? Creditors _____________ reach trust property held in a spendthrift trust.

When, if ever, can creditors reach? Creditors can attach when the trustee ___________ _______________________________.

Example 17: T-Bone’s son, Clyde, loves to play the ponies and, as a result, he has racked up a considerable amount of personal debt. Concerned that Clyde will never be financially secure, T-Bone inserts a spendthrift clause into the trust he created for Clyde’s benefit. As a result of this clause, Clyde cannot alienate his interest in the trust property. Nor can Clyde’s creditors reach the trust property until the trustee makes payments to Clyde.

But Wait!: A spendthrift clause is not bulletproof. There are some exceptions where a creditor can reach the beneficiary’s assets despite a spendthrift provision:

• ___________________________________________________ entitled to support, • Those providing ________________________________________________ to the

beneficiary, and • Holders of federal or state _________________________

But Wait Again!: Courts will not enforce a spendthrift provision if the settlor is also the __________________________. That would make it too easy for the settlor to avoid creditors.

CHAPTER 5: TRUST TERMINATION AND MODIFICATION

A. Termination

Expiration

o An express trust can _________________ at the end of a stated term.

Example 18: T-Bone creates a trust for the benefit of his son Clyde, which terminates when Clyde turns 25. The trust will naturally terminate on Clyde’s 25th birthday.

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Unfulfilled Material Purpose (aka "The Claflin Doctrine")

o The settlor is gone, dead, out of the picture o The beneficiary wants to terminate a trust prematurely and the ____________________

opposes termination.

Example 19: T-Bone creates a trust for the benefit of his son Clyde, which will terminate when Clyde turns 25. On Clyde’s 22nd birthday, he notifies Hank, as trustee, that he wants to terminate the trust. Hank opposes premature termination.

o Claflin: Texas follows the Claflin doctrine, which holds that a trustee can block a premature termination if the trust is still serving some _______________________________________.

Easy cases under Claflin, i.e., where trust serves has an unfulfilled material purpose (no premature termination):

• Discretionary trusts • Support trusts • Age-dependent trusts/delayed enjoyment trusts (like Example above) • Spendthrift trusts

Material Purpose Fulfilled

Example 20: S leaves her estate to T in trust "to A for life, then to B." B, the remainder holder, predeceases A. B leaves A as her sole heir. Here, the material purpose of the trust cannot be fulfilled. A moves to prematurely terminate, over T's protests. A court is likely to say that premature termination is legitimate.

Settlor’s Intent

o In most states, a settlor must expressly reserve the right to terminate a trust. Otherwise, the settlor needs the approval of all the beneficiaries.

o In Texas, the presumption is reversed. A trust is presumed to be revocable, unless the settlor explicitly says otherwise.

B. Modification

Settlor’s Intent

o In Texas, a settlor can modify because the trust is presumed to be revocable (or modifiable).

Changed Circumstances

o If the settlor is ___________ and all the beneficiaries ______________ to modify a court can modify a trust if an unforeseen event ________________________ the purpose of the trust.

Example 21: Saul Bellowstein created a trust for the benefit of his grandchildren. Due to substantial changes in the tax code since the trust was created, the grandchildren all agree that the terms of the trust should be

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changed so as to lower the grandchildren’s tax burden. Courts have become increasingly receptive to this argument in the context of taxes.

Example 22: Saul Bellowstein created a trust for the benefit of his daughter. The trust provided that Saul’s house was not to be sold until the daughter dies. When the trust was created, the neighborhood was lovely—picturesque, safe, cozy—but it became blighted over the next 30 years. Daughter wants to sell the home so she can move to a new neighborhood. She will argue that the purpose of the trust—to provide her with a safe, decent place to live—has been frustrated and is no longer serving a purpose.

C. A Few Notes about Modification/Termination and the Trustee

• A trustee does not have the power to terminate or modify a trust through _______________________ action.

• A trustee can be removed from her position. • Think of trustee removal in terms of a __________________ for when the trustee has breached

a fiduciary duty or otherwise grossly ______________________________ trust property. • Most courts consider trustee removal according to the circumstances of the individual case. • Here are some examples where removal might be granted:

o The trustee became incapable of performing her duties (ill, incapacity, jail, etc.) o The trustee materially breached one of her duties o A conflict of interest arose o A serious conflict between the trustee and one of the beneficiaries arose o The trust persistently performed poorly as a result of the trustee's actions or inaction

D. Resignation

• The trustee has the ability to resign. • Either the trust instrument will outline this procedure OR the trustee must petition the court to

authorize the resignation.

CHAPTER 6: PRINCIPAL AND INCOME ALLOCATIONS

• This chapter considers how trustee must balance interests between different classes of beneficiaries.

Example 23: Saul Bellowstein conveys a sum of money, in trust, to Thaddeus, for the benefit of Larry for his life, then to Raul.

• Why do we care? A trustee must allocate all assets received to either principal or income.

A. Traditional Approach: The old way

• Income: Life beneficiaries would be entitled to the income of the trust, i.e. the money earned from investments.

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Example 24: This would be Larry in the Example above.

Editor's Note 3: Professor Kramer misspoke here. Larry, not Thaddeus, is the life beneficiary in Example 23.

o Any money generated by trust property was __________________.

• Principal: The holder of the remainder interest would be entitled to the trust principal.

Example 25: This would be Raul in the Example above.

o Any money generated from transferring trust property was _____________________.

B. Modern Approach: Out with the old, In with the New

• The Uniform Principal and Income Act (UPAIA): Adopted in Texas, UPAIA says that trustee focus on the “________________________________" of the trust portfolio.

• Under this rule, the trustee can recharacterize and reallocate items as necessary to fulfill trust purposes.

o Allocations must be ______________________________ o Here are some of the factors the trustee must balance in making these determinations:

The _________________ of the settlor and the ___________________________ of the trust instrument

The __________________, ___________________________, and __________________ of the trust

The identities and circumstances of the _________________________________ The anticipated effect of ___________________________________________________ The anticipated _______________________________________________

CHAPTER 7: FUTURE INTERESTS

• This segment is a brief refresher of future interests. Make sure to refer to your outline for greater detail.

A. What’s What?

Possessory Estate: The holder of a possessory estate has the right to ____________________ possession.

Future Interest: The holder of a future interest has the right to possess it in the future.

Note 3: A future interest is a presently existing right; it is a present right to _____________________________________________________.

Fee Simple Absolute: The largest of the estates because it is capable of lasting ______________

Example 26: O devises property "to A (words of purchase) and her heirs (words of limitation)." "And her heirs" lets us know that A has a fee simple absolute.

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The modern presumption is that the grantor is conveying as much as she has unless the grantor says otherwise, so "to A" would be the same as "to A and her heirs."

Defeasible Fee: Fee simple that is capable of being cut short

Fee Simple Determinable: A fee simple for a _____________________________________ __________________

Example 27: "O to A and her heirs so long as the land is farmed." "So long as," "while," or "during which time" are all durational language (which indicates a fee simple determinable). A has a fee simple determinable while O has a possibility of reverter.

Fee Simple Subject to Condition Subsequent: A fee simple that is terminated upon the happening of an _______________________________________________________

Example 28: "O to A and her heirs, but if liquor is ever served on the premises, then O can reenter and retake." O retains the future interest, which is a right of entry (or a power of termination). The right of entry must be elected; unlike the possibility of reverter, it does not happen automatically.

Life Estate: A present possessory estate that ends _____________________________________ __________________________________

Note 4: The life estate has become a key part of trust practice.

Example 29: S creates a trust "for the benefit A for life, then to B." A has an equitable life estate; it’s an equitable life estate (as opposed to a legal life estate) because A is a beneficiary to the trust.

o Reversion: A future interest held by the grantor, following a _________________________

pable of becoming possessory at the _____________________________ _______________________________________ of a grantee’s life estate

Example 30: "O to A for life." A has a life estate. O has retained a reversion. O’s interest becomes possessory at A’s death.

Note 5: Reversion, possibility of reverter, and right of entry are all future interests held by the grantor.

Remainder: A future interest that is capable of becoming possessory at the natural termination of the ________________________________

o By definition, a remainder is held by a ___________________________________.

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o 3 Remainders Important to Trust Practice:

1) Vested Remainder

• Where taker is _______________________________ and there is not a _________________________________________

Example 31: "O to A for life, then to B." B is ascertained and there’s no condition precedent in order for B to take. B has a vested remainder that will become possessory when A dies.

2) Vested as a Class Gift

• Also known as vested subject to partial divestment and vested subject to open • Of a class of takers, some members are vested while other members remain open.

Example 32: "O to A for life, then to O’s children." O has one child, B. The gift is vested as to B, but open as to any latter-born children. (Since O is still alive, O can have more kids.) The class closes when O dies.

Exam Tip 4: Living people have a nasty habit of breeding. If a person is alive, assume that the person will have more kids.

3) Contingent Remainder

• Where taker is either __________________________________ or ______________ ________________________________________________________.

Example 33: "O to A for life, then to B if B graduates from law school." B is still in college. B’s interest is contingent because B has not yet satisfied the condition precedent.

Example 34: "O to A for life, then to B’s first child." B has no kids. The child’s interest is contingent because the child is not ascertained. Now let's say that B has a child, C. When C is born, C's interest is vested.

Executory Interest: An interest held by a grantee (transferee) that will divest a prior vested interest. This interest is rude; it will __________________________ a prior vested interest.

o Two Types:

1) Springing Executory Interest

A future interest that divests the _________________________

Example 35: "O to A for life, then to B if B gives A a proper funeral." B has an executory interest. B’s interest will vest when B gives A a proper funeral. B can’t give A a proper funeral the moment A’s life estate ends, because it is impossible. So there will be a gap in time. When A dies, A’s life estate will revert to O. O will hold it under that reversion. If and when B gives A a proper funeral, the interest will spring from O to B.

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Example 36: “O to A on A’s 25th birthday.” A is 18 years old. A has a springing executory interest in fee simple absolute. On A’s 25th birthday, A will divest O.”

2) Shifting Executory Interest

A future interest that divests a ____________________________________

Example 37: "O to A for life, then to B and her heirs, but if B goes to law school, then to C." For C’s interest to vest, C must divest B. C’s interest will shift from B to C.

B. Taking Stock

The name of the game in future interests is classification. Ask the following questions:

Who has the present possessory estate?

Who has the future interest?

When, if ever, will the future interest vest?

Example 38: Saul Bellowstein executes a deed of trust, conveying his estate "to Arnold, in trust, for Arnold’s life, then to Saul’s children, Bernie and Claudette."

Question 1: Who has the present possessory estate? _____________________

What is it? ____________________________

Question 2: Who has the future interest? _______________________________ ____________________________

What is it? _______________________________________________________

Question 3: When, if ever, will the future interest vest? ___________________ __________________________

CHAPTER 8: ADMINISTRATION

• In this segment, we consider trust administration through the lens of a trustee’s duties in managing the trust, as well as the trustee’s powers in her capacity as trustee.

A. Powers of Trustee

• With respect to the powers of the trustee, always start with the ____________________ _________________________. If silent, then refer to statutory and common-law principles.

• If the trust is silent, the modern trend in trust law (including in Texas) is to grant the trustee all those powers ____________________________ to act as a ____________________________ ___________________________ person in managing the trust.

o This includes, among other things, the power to:

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Sell or transfer __________________________________________ Enter into a ____________________________________________________ Pay ________________ and reasonable expenses Sever or consolidate trust property

Note 6: Remember that the trustee owns legal title to the trust property, which gives the trustee the authority to act as the owner of the trust property.

B. Administration

• We will focus in particular on two of the trustee’s duties: ________________________ ______________________________

• A trustee is bound by a range of fiduciary duties designed to ensure that the trustee acts ____________________________________________ of the beneficiaries when investing and managing the trust.

• _________ beneficiary has standing against the trustee to enforce these fiduciary duties.

o Such standing grows out of the beneficiary’s _______________________________________ in the property.

C. Duty of Loyalty and Good Faith

• The trustee owes the beneficiary a duty of loyalty. Think of this as a two-part inquiry:

1) Loyalty is governed by an __________________________ standard: Did the trustee act reasonably?

2) Good faith is governed by a ___________________________ standard: Did the trustee act in good faith?

1. No Self-Dealing

o A trustee cannot profit from self-dealing.

Example 39: T-Bone Taylor serves as the trustee for a trust. In his capacity as trustee, T-Bone sells stock from the trust to himself for fair market value. T-Bone has breached the duty of loyalty because he engaged in business with the trust.

No Further Inquiry

o Self-dealing is patrolled by the "no further inquiry rule," which says that once self-dealing is established, a court will ____________________________ into the trustee’s reasonableness or good faith.

o Self-Dealing = per se breach of duty of loyalty

Example 40: T-Bone served as the trustee managing a trust created by his best friend, Hank Marducas. Short on cash one week, T-Bone borrowed money from the trust so he could pay for his wife to take a wine appreciation class. T-Bone paid the money back, plus interest, the following week. Under no further

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inquiry, we don’t inquire into whether the trust was harmed in any way by the loan. It is a per se breach of the duty of loyalty.

o Even if the trust documents authorize self-dealing, the transaction must still ____________________________ and _____________ for the trustee to avoid liability.

Conflict of Interest

o If a trustee enters into a non-self-dealing conflict of interest, the conflict is assessed under the ___________________________________ and _____________________________ test.

Example 41: Mr. Tea is the trustee for a trust that owns a valuable instrument collection. The trust needs to sell some of its stock of instruments, so it contracts with Music Auction Store to sell them. Although Mr. Tea is not formally affiliated with Music Auction Store, T builds one-of-a-kind guitars and the Music Auction Store agrees to sell his guitars, as well. This is a conflict of interest, though it is not self-dealing. Why? Because it seems like the Music Auction Store is doing business with the trust to get T's business. It looks suspect.

The question for the court is whether the transaction between T and the Music Auction Store was reasonable and in good faith.

Duty of Care/Prudence

o In a trust setting, the standard of care imposed upon the trustee is that which a person of ____________________________________________ would practice in the care of his own estate.

o Gist: Trustee should treat the trust property as if it’s her own property.

If trustee has special skills or expertise, we expect the trustee to use these special skills. Thus, the skilled trustee is held to a ____________________________________ standard of care/prudence than the ordinary trustee.

Note 7: At common law, a trustee could not delegate authority to a third party.

o Modern law permits delegations if it would be unreasonable for settlor to expect trustee to undertake such functions, e.g. investment decisions.

In that case, the trustee must oversee the decision-making process.

Special Case #1: Investments

o Old Rule: At common law, trustees were limited to specific list of acceptable investments. The trustee breached if she departed from the list of acceptable investments.

o Modern Rule (in Texas): The ________________________________________________ rule holds that a trustee has the discretion to invest and manage the trust property as would a prudent investor.

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What does this mean in practice? The trustee is expected to ____________________ assets so as to spread the risk of loss. In other words, the goal is make the trust property as ____________________________ as possible.

Measure investment success by looking at the portfolio __________________________, not by looking at individual investments; called the “portfolio approach”

Special Case #2: Duty of Impartiality

o In a trust with successive interests, i.e., both present and future beneficiaries, the trustee has a duty to ____________________ competing interests of the different classes of beneficiaries.

Life Tenant: Normally entitled to trust _______________________ Remaindermen: Normally entitled to the trust ____________________________ The Tension: All assets received by a trustee must be allocated to either income or

principal. The duty of impartiality demands that the allocation be balanced so as to treat life tenants and remaindermen fairly.

Consider the following:

Example 42: T-Bone is the trustee for a trust benefitting Hank Marducas for life, with a remainder to Bonnie and Clyde. Hank has a ____________________ interest; Bonnie and Clyde have a _________________ interest. Because of the nature of the trust property, the principal is increasing steadily, but the property is not producing substantial income. This works to the benefit of Bonnie and Clyde and to the detriment of Hank.

o Traditional Approach: The traditional approach assumed that:

Any money generated by trust property was _______________________ Any money generated in connection with a conveyance of trust property was

_______________________________

o Modern Approach: The Uniform Principal and Income Act. This statute sets a standard of looking at the ____________________________________________ on the portfolio, regardless of classifications of income or principal.

The trustee is empowered to re-characterize items and reallocate investments as necessary to fulfill trust purposes, provided the allocations are _______________________________.

Administrative Duties

o These concern management obligations imposed upon the trustee so the beneficiaries can keep an eye on the trustee’s work.

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Trustee has a duty to ________________ beneficiaries about the nature of the trust property.

The trustee must give beneficiaries sufficient information so they can enforce their rights.

Trustee has a duty to ________________________ for actions taken on behalf of the trust.

Think of this as the trustee’s duty to __________________ on the health of the trust’s portfolio.

D. General Advice

1) Study your way—don’t worry about others

2) Stress is not a bad thing—let it motivate you

3) Don’t be overwhelmed—eat, rest, take a break!

GOOD LUCK ON THE EXAM!

[END OF HANDOUT]

22 | © 2019 Themis Bar Review, LLC | TX Trusts