Welcome to law school, a deep dive.
We're tackling Trusts and estates Lecture 3, and our
mission today is, well, it's pretty critical.
We're making a big conceptual shift, moving beyond that death
centric focus of wills and into the really complex sort of
enduring architecture of trusts. Our goal is to take all these
essential rules and principles and really lock them in for your
next exam. That's absolutely right.
It's a huge shift. If the first two lectures were
about estates that one time transfer the snapshot at death,
This is the motion picture. Trust law is all about the
ongoing management of property over time.
It's a completely different skill set.
OK, so let's unpack that. With Wills, we were focused on a
single moment, right? Did the testator have intent?
Were the witnesses there? Historical inquiry, Exactly.
But with trust, you're saying it demands this sustained
attention. Why does it turn into such a
dynamic, ongoing challenge? It's the fiduciary relationship
that defines everything. A trust, especially an
irrevocable 1, is like a miniature legal economy that's
designed to last for decades. So the core analytical challenge
and what makes these exam questions so tricky is this
constant tension. Tension between what?
Between the settlers original intent, which might be decades
old, and this constant stream of intervening policy rules.
You mean things like tax law changes?
Tax law, Creditor rights, New state uniform acts Like the
CUTC, it's always evolving. O The key for the learner isn't
just knowing the parts of a trust, it's understanding how
that whole management architecture needs to be
constantly adjusted. Recisely, you have to understand
modification, decanting, administration and through it
all this strict, uncompromising adherence to fiduciary
standards. The initial take away then is
that trusts are a living, breathing legal machine.
A machine in motion. You're not just analyzing its
creation, you are testing its continuous operation.
Against all these standards, it's a living document.
All right, let's start with section one, trust formation and
the fundamental classifications. In the simplest terms, the law
sees two major groups, those created on purpose and those the
law just. Implies exactly.
We start with the intentional ones express trusts.
This is where the settler makes a very clear declarations.
They name a beneficiary, A trustee and they transfer
property. All the basic requirements are
met. And this is almost always a
written document I assume. Almost always, especially if
real property is involved, you know you have to satisfy the
Statute of frauds. Now, some places might recognize
oral trusts for personal property, but proving the intent
and the terms without a writing is, well, it's an uphill battle,
expensive, and it often fails. OK, but the real difficulty on
an exam usually comes when the trust isn't written down.
Or maybe an express trust fails. We're moving into implied
trusts. Yes, and these arise strictly by
operation of law, and you absolutely must keep the two
types distinct, resulting and constructive.
This is a core exam distinction. Why is it so core?
Because the court's whole reason for imposing the trust is
fundamentally different. Resulting trusts are all about
resumed or inferred intention. The court isn't unishing anyone,
it's just saying the transfer never meant for the other person
to actually enjoy the property. So the property should result
back to the original owner. It results back exactly.
So the court is saying the intent here failed or it was
unclear, so we assume the property should go back to
whoever put it there. What are the classic triggers
for that on an exam? 2 main fact patterns.
First, the automatic resulting trust.
This happens when an express trust just fails.
Fails how? Maybe the purpose is completed,
or there's no beneficiary, or the money runs out.
The property just automatically goes back to the settler or
their estate. It's almost an administrative
correction. OK.
And the second pattern, the one that usually involves title
disputes. That's the purchase money
resulting trust. This is where one person pays
for property, but the legal title is put in someone else's
name, like a. Parent pays for a house but puts
it in their adult child's name. Perfect example.
The law presumes no gift was intended, so the child is seen
as holding that property in a resulting trust for the parent
who paid. But that presumption can be
rebutted. It can, but you need clear
evidence that a gifts was actually intended.
The key analytical cue is always intention, even if it's just
inferred. Right now, let's contrast that
with its polar opposite, the constructive trust.
If a resulting trust is about correcting failed intent, what's
the foundation for a constructive trust?
It's not intent at all. It's equitable policy.
A constructive trust is purely a remedy.
The court imposes it, sometimes very forcefully, to prevent some
kind of unconscionable outcome or a wrongful act.
The trigger isn't failed administration.
It's demonstrated wrong. So we're talking about
malfeasance, fraud, breach of fiduciary duty that sort of.
Thing Yes. Fraud, duress.
Undue influence. A blatant breach of fiduciary
duty. That is your undeniable cue for
a constructive trust. For instance, if a trustee uses
trust funds to buy a house in their own name, a court will
immediately impose A constructive trust on that
house. The trustee can't benefit from
their own breach. And the goal is often preventing
unjust enrichment. But the key is the underlying
wrong. That's it.
And once the constructive trust is imposed, the trustee isn't
really a trustee. They're just a placeholder
compelled to immediately give the property back to the
rightful owner. It's an involuntary way to force
restitution. Exactly so for the exam.
Remember failed intent or unclear title.
Think resulting trust fraud or fiduciary breach.
Think constructive trust. And since their remedies imposed
by a court, neither one requires a writing, they're exempt from
the Statute of Frauds. All right, let's move from how
they're created to how they operate.
Revocable versus irrevocable. The Revocable Trust, the Modern
Living Trust, has really become a centerpiece of modern estate
planning. Because of the flexibility
that's paramount in irrevocable trust, the settler keeps all the
power. They can amend it, revoke it,
change beneficiaries, swap out property.
And because they keep that control, they're still treated
as the owner for tax and creditor purposes during their
life. Correct.
The key strengths are continuity and management.
Continuity is huge. Imagine a settler with a complex
business. They can manage it their whole
life and when they die the assets just bypass probate.
That probate avoidance is the headline benefit for sure, but
don't overlook incapacity planning.
This might be its greatest strength.
How so? If that same business owner
becomes incapacitated, the successor trustee they already
named can step in immediately. No need for a lengthy, public,
expensive court guardianship. It's seamless and private.
If the revocable trust is all about flexibility, the
irrevocable trust is its rigid counterpart.
Once it's funded, you generally can't change it, right?
And that rigidity seems like a big constraint, but it unlocks
some really significant benefits such.
As robust. Protection and advanced tax
planning. The two big strengths are asset
protection and tax efficiency. Properly structured, the assets
are no longer considered the settlers property, so they're
shielded from future creditors. Subject to fraudulent conveyance
laws, of course. And second, by getting the
assets out of the settlers estate you minimize estate and
give taxes. Exactly you preserve more wealth
for the next generation and they're vital for things like
Medicaid planning, shielding assets for long term care
eligibility. So it's.
A strategic choice, Flexibility and probate avoidance, you go
revocable. Asset protection and tax
minimization, you go irrevocable.
This brings us to a planning tool that kind of bridges the
gap between the will and the trust, the poor over will and.
It's an elegant solution for, well, for human imperfection
human. Imperfection.
I like that because. No matter how careful you are,
you'll forget to retitle an account or an asset pops up
right before death. The poor over will is the safety
net. The will names the living trust
as its sole beneficiary. It legally pours any assets left
out of the trust at death into the trust.
So. The single objective here is to
minimize what goes through probate precisely.
The trust already holds the big assets, the house, the brokerage
accounts, so the will itself might just govern a car or a
small bank account. This tiny estate might even
qualify for a faster, cheaper summary probate process.
It's a vital protection so. What are the critical
requirements to make a pour over will valid?
We should probably focus on the Uniform Testamentary Additions
to Trust ACT or Utada Utada. Is your guide here.
It validates the transfer. For it to work, a few things
have to be strictly true. First, the will has to clearly
reference the trust. Second, the trust has to be
executed before or at the same time as the will.
That's a critical chronological requirement, and.
Does the trust need to be funded at that point?
No, and that's a key detail. The trust can be funded or
unfunded when the pour over will is signed.
You just need the legal document ready to receive assets and.
Following Utah streamlines everything, avoiding having to
attach the whole trust document to the will for probate it.
Does, but be careful with amendments in some places.
If you amend the trust after you sign the will, you might need to
republish the will to make sure it refers to the latest version.
If you revoke the trust entirely, the gift just lapses.
OK. Let's shift from creation to
administration, and specifically the massive role that
distribution mechanics play in tax planning.
This brings us to one of the most vital acronyms in trust
design HEMS. HEMS. It stands for Health, Education, Maintenance
and Support. HEMS. Exactly.
These 4 terms form what are known as ascertainable
standards. They are specific, objective,
measurable guidelines that a trustee must follow when making
distributions. They're not suggestions.
They're defined under federal tax law.
Let's. Break those down because
maintenance and support seems like it could be a real trap for
a trustee. It can.
Be health is the most objective medical, dental, mental health,
long term care, anything related to well-being and.
Education is usually interpreted very broadly.
Very. Broadly, private school,
college, grad school, vocational training, even related costs
like room and board. OK.
Now for the tricky part, maintenance and support.
The key phrase here is a custom standard of living, right?
That is the absolutely critical operative phrase.
It's not about mere survival. The trustee has to look at the
beneficiaries current and prior lifestyle to see what's required
to maintain that standard. So it.
Covers things like rent, utilities, food, clothing, and.
Even reasonable vacation travel if that's customary to their
lifestyle. So if the beneficiary is used to
living in $1,000,000 house and driving a luxury car, HEMS
allows for distributions to maintain that as long as it's
reasonable for the trust. Exactly.
It's a relative standard, not an absolute 1, and it requires the
trustee to do their due diligence, often asking for
financial statements to justify the distributions.
So. Why are these 4 letters hems so
essential? Why are they the firewall of
modern trust, planning it all? Comes down to avoiding a massive
estate tax trap. The general power of appointment
Let's. Unpack that.
OK. So the IRS rule says that if a
person, say the grantor's child is both a trustee and a
beneficiary, they can distribute assets to themselves for any
reason Pure. Discretion pure.
Discretion. The IRS will treat that as if
they own the assets outright, and when that person dies, the
entire value of the trust could be included in their taxable
estate. Which?
Could trigger a massive tax bill and undo all the planning,
right? And hemp ES is the solution.
It prevents the power from being categorized as a general power
of appointment because the discretion is restricted only to
health, education, maintenance and support.
Federal tax law specifically says this is not a general
power. The power is limited by an
objective external standard and that keeps the assets out of the
trustee beneficiaries taxable estate makes.
Perfect sense, but beyond the tax integrity, what other
functions does hempest perform it?
Serves at least three other critical non tax functions.
First, creditor protection. How so?
In many states, if a beneficiary's access is limited
to these specific standards, creditors generally can't force
a distribution outside of those defined.
Needs. OK.
What's second trustee? Guidance and accountability It
gives the trustee a clear, objective framework It replaces
vague terms like comfort or happiness, which just invite
lawsuits and. The third.
Gift tax avoidance. If a trustee can make
distributions to others, tying that power to Hems helps prevent
those distributions from being considered a taxable gift from
the trustee. It's a perfect balance of
flexibility and restriction. All right, we need to turn to a
really technical but important planning issue, the grantor
trust tax reimbursement dilemma this.
Is a complex one. It usually involves an
irrevocable grandeur trust, where by design, the grantor is
treated as the owner for income tax purposes.
So the. Grantor pays the income tax on
the trust's earnings, but the assets are outside their estate
for estate tax purposes. Exactly.
This allows the trust to grow income tax free.
From the trust's perspective, the problem comes when the trust
has a huge capital gain. Say it sells a business and.
Suddenly the grantor has a massive personal income tax bill
on money they can't even access right.
And while they might have planned to pay the tax,
sometimes it's crippling. They might want the trust to
reimburse them. The risk is that if the grantor
has a right to reimbursement, the IRS could say that's a
retained interest and. Pull the assets right back into
their taxable estate. Devastating, which is why the
IRS gave us a Safe Harbor in Revenue Ruling 2464.
It outlines how you can have a discretionary reimbursement
power. Let's break down the four
conditions for that safe harbor, OK?
First, there can be no express or implied understanding that
the trustee will always reimburse.
Their discretion has to be absolute.
Second. Condition the.
Grantor's power to remove and appoint trustees must be limited
to independent trustees, people who aren't related or
subordinate to them so. They can't indirectly control
the decision, right? 3rd, the provision cannot create
creditor access under state law. If a creditor could reach that
reimbursement power, the whole thing fails and the.
Last one is the most nerve wracking.
No other facts. That's.
The catch all? No other facts can exist that
suggest a secret agreement, and this is the opening the IRS can
use, especially when you consider leader laws, which.
Brings us to the 2005 Bankruptcy Code amendment, section 548, a
10 year look back for transfers to a self settled trust if it
was made with actual intent to defraud creditors and this.
Is where the safe harbor gets really murky.
The big debate is whether just having a tax reimbursement
clause counts as an other fact or shows actual intent to
defraud. What's.
The argument that it's not fraudulent.
The argument is that the provision is there to pay a
specific creditor, the IRS. It's an act of responsibility,
not fraud. You're not trying to hide assets
from creditors. You're trying to pay the
government. But.
The other side argues that dollars are fungible.
Exactly. The opposing view says that
taking money out for any reason is a retained interest.
It overturns the common law rule against self settled spendthrift
trusts which section 548 E was designed to combat.
So this. Creates a huge drafting
challenge. What are the solutions?
Well. You can forgo the clause
entirely and just avoid the risk, or you could include it
and argue that 548 E is only triggered by known looming
creditors. That's a litigation risk and.
The third most sophisticated approach you use.
Careful drafting. Turning on a distinction from
the famous case Commissioner V Proctor, you create a condition
precedent. What does that?
Mean the. Clause states that the
reimbursement power won't be exercised if doing so would
create a state tax inclusion risk.
It's a savings clause. So why does a condition
precedent work when a condition subsequent the kind struck down
and Proctor fails? Because a condition subsequent
tries to undo a transfer after the IRS calls it taxable.
A condition precedent defines the power from the very
beginning. It sets the limits on the power
from the moment the trust is created, excluding the specific
power that would cause the problem.
That distinction is pure law school mastery.
OK. Let's move on.
We've established trusts, our long term architectures, which
means we need ways to change them.
We're going to use the Connecticut Uniform Trust Code,
or CUTC, as a framework for how modern law handles modification
and termination. The.
CUTC is a great model. It's mostly a default statute,
meaning you can override it in the trust document, right?
But has mandatory rules like the duty of good faith that you
cannot waive and. The CUTC maintains a crucial
split between testamentary and inter vivos trusts.
A huge split testamentary trusts, the ones created by a
will, are subject to mandatory court oversight.
A trustee can't just resign, they need court approval.
Whereas. Inter vivos or living trusts
have much more non judicial flexibility right So if.
You see an exam question about court supervision.
The first question you ask is, is this a testamentary trust?
If yes, the court is probably involved The.
CUTC provides 5 clear judicial paths for change.
Let's start with the first one. For unforeseen events, change
circumstances. The Who knew path.
This is a powerful one. It applies to any irrevocable
trust. The court has to find two
things. One, the circumstances were
unanticipated by this other and two, the proposed change
furthers the purposes of the trust and aligns with the
sellers probable intentions. Give me.
An example a. Trust from the 80s that says the
trustee can only own General Motors stock if GM goes
bankrupt. That's an unanticipated
circumstance. A court could modify it to allow
a diversified portfolio to preserve the trust purpose and
you. Don't need all the beneficiaries
to agree, no. The court can override
objections, OK. Path to is more relaxed consent
of all or almost all beneficiaries, right?
Here, the change just has to be not inconsistent with the
material purpose of the trust, a much lower bar.
And even if only almost all beneficiaries consent, the court
can approve it if the non consenting parties are
adequately protected. What?
About a spend thrift provision, is that automatically a material
purpose? No.
Under the CUTC, A spendthrift clause is not automatically a
material purpose. The court loose to see if the
settler specifically said it was.
This is a big change from old common law path. 3 is the
cleanest. It seemed like a good idea at
the time. This only applies to new trusts
where the settler is still alive and competent.
If the settler and all the beneficiaries agree, they can
modify or terminate the trust for any reason, even if it's
inconsistent with a material purpose and.
Path 4 is for human error modification to correct mistakes
or the OOPS path. Right here the petitioner has to
prove the settlers original intention by clear and
convincing evidence of very high standard.
And the mistake could be a typo, A scrivener's error, or a
mistake of fact or law that the settler made.
Exactly. And finally, path 5 is
specialized for taxes modification for tax objectives.
This allows a trustee or beneficiary to petition to
modify a trust to achieve the settlers tax goals as long as
it's not contrary to their probable intent.
Things like fixing a marital deduction or preserving a GST
exemption while the. Courts provide those paths.
Modern law really favors non judicial solutions.
Let's talk about the non judicial settlement agreement or
NJSA the. NGSA is a key tool, especially
for inter vivos trusts. It lets you resolve almost any
matter so long as it doesn't violate a material purpose and
it's something a court could have approved.
What? Kinds of things can you resolve
with an NJSA. Interpreting ambiguous terms,
approving an accounting, granting the trustee new powers,
all kinds of things that save time and legal fees.
A. Crucial part of this is virtual
representation. You have to be able to bind
future beneficiaries. Absolutely.
Virtual representation is the legal mechanism that allows a
current beneficiary to represent and bind the interests of future
unborn or minor beneficiaries who have substantially identical
interests like. A parent representing their
child. Exactly.
Without it, you could never get everyone's consent and the NJSA
would be useless. Beyond formal agreements, we
have other modification tools, decanting division and merger.
What's the key to being able to decant assets into a new trust?
It almost always hinges on the first trust's invasion power.
The trustee usually needs an absolute, purely discretionary
power to invade principle. If it's limited by hams,
decanting is usually off the table and there are limits.
Right. You can't just add new
beneficiaries, correct? And you can't eliminate A
beneficiary's presently exercisable rights like right to
withdraw assets at age 35 and. Merger and division, these are.
Mostly statutory tools for tax planning.
Division is common for separating assets for GST tax
purposes or for children with different goals, and again for
testamentary trusts. You'll likely need court
approval, but. All this flexibility comes with
a big warning label from the IRS.
What are the tax consequences of modification the.
Risk can be severe. The biggest one for
beneficiaries is gift tax risk. If a beneficiary consents to a
change that diminishes their interests, like giving up a
right to income, the IRS might say they've made a taxable gift
to the other beneficiaries. When?
Is that risk highest? It's.
Highest When state law gives the beneficiary a right to object
and they don't exercise it, their passive consent can be
seen as a transfer. And what about the?
Impact on a trust's existing tax status like a grandfather GST
exempt trust you. Have to be incredibly careful.
A modification can't shift beneficial interest to a lower
generation or extend the vesting period.
If it does, you could lose that valuable grandfathered status.
It requires meticulous attention to the regulations.
OK. Let's get to our final section,
the duties of the trustee and how they can protect themselves
from liability these. Duties are the foundation of the
whole operation. Once you accept the job, you
have to administer the trust in good faith, according to its
terms, the law, and the seller's intent.
Let's. Run through the key duties
first. The overarching duty of
administration that binds everything second.
The most critical one, the duty of loyalty, non.
Negotiable. You must act solely in the
interest of the beneficiaries. Avoid all conflicts of interest.
No self dealing. The presumption is always
against the trustee in a conflicted transaction. 3rd, the
duty of impartiality. This is key when you have
different classes of beneficiaries you have.
To be equitable, you can't favor the current income beneficiary
at the expense of the remainder beneficiaries.
This really drives your investment strategy and. 4th
prudent administration you have. To use the skill and care of a
reasonable person. And the CUTC gives trustees
incredibly broad default powers which just reinforces the high
standard of care required to exercise them.
The key part of. Accountability is keeping
beneficiaries informed. The CUTC draws a sharp line
between notice duties you can wave and those you can't.
This. Is vital.
The mandatory rules, the ones you absolutely cannot wave, are
few but critical. They include the duty to notify
qualified beneficiaries that the trust exists, who the trustee
is, and the right to a report. But the most important non
waivable duty is to respond to a beneficiary's reasonable request
for information. So even in a silent trust, a
beneficiary eventually gets the right to ask questions and get
answers. Exactly.
The rules you can waive are generally about how proactive
the trustee has to be. Things like sending out annual
reports without being asked. This allows for privacy, but not
total secrecy given. All these standards trustees
face huge personal liability. How can they protect themselves?
What? The trust can have an
exculpation clause, but they have limits.
They're unenforceable if the breach was committed in bad
faith or with reckless indifference.
The law won't protect a trustee who is grossly negligent.
The. 2nd and often easiest, protection comes from the
beneficiaries themselves, right? Consent, release or ratification
A trustee is protected if the beneficiary agreed to the action
beforehand, release them from liability, or approved it after
the fact but. There's a big exception.
A huge one. The protection fails if the
consent was improperly induced, or if the beneficiary didn't
know their rights or the material facts.
And for testamentary trusts, this isn't enough.
You still need a judicial decree there.
Are also protections for third parties dealing with the trust?
Yes. Someone like a bank or a title
company is protected if they act in good faith without knowing
the trustee is exceeding their powers.
They don't have to launch a full investigation and that.
Leads to the final protection, the certification of trust,
which is. Really a privacy tool.
It lets the trustee give key information, who the settler is,
what the powers are to a third party instead of the entire
trust document. It keeps the financial details
private while allowing business to get done This.
Deep dive really shows that mastering trust law is about
mastering procedure and balancing interests.
We've seen the critical tools AMS for tax integrity to avoid
that general power of appointment trap and the careful
balancing act of modification under the CUTC with its five
distinct judicial paths and. We've seen how vital procedure
is for trustee protection, getting informed consent under
Section 74, understanding the limits of exculpation or using a
certification of trust. The practitioner has to be
meticulous. The ultimate synthesis here is
that while an irrevocable trust is theoretically set in stone,
modern law recognizes that change is inevitable.
The challenge is knowing how to use these modification pathways
to preserve the settlers intent in a changing world and.
That raises the most important question for you, the learner.
As you prepare for your exam, you have to recognize the
foundation of the courts intervention.
When you read a fact pattern, you must ask is the court acting
based on the settlers presumed or failed intent like in a
resulting trust or a reformation?
Or is it acting based on overriding equitable policy like
in a constructive trust or the Cutcs mandatory rules because.
The entire analysis, the standard of proof, the remedy
changes completely depending on whether the foundation is intent
or policy. It changes everything.
A perfect final distinction to close the books on Lecture 3.
Welcome. To law school a deep dive today
we we are tearing down the concept of a trust and building
it back U piece by piece. My goal is simle by the end of
this, you're not only going to have the key rules you need to
crush your exams, but you'll actually get why this thing is
such a powerhouse in the legal world.
O let's get into the anatomy of a trust.
So let's kick things off with this quote from the legendary
legal scholar Austin Scott. And what's so powerful here is
that he's not just saying trusts are kind of useful.
No, he's saying they're one of the greatest legal inventions
ever. This isn't just another contract
or a will. It's a revolutionary idea that
completely changes the game of what it means to own property.
OK, so at its absolute core, a trust is a three-way
relationship that does something kind of brilliant.
It splits ownership in two. You have the settler who creates
it, you have the trustee who manages it, and you have the
beneficiary who, well, gets the benefits.
Here's the magic trick you have to understand.
The trustee gets what's called legal title.
They're the owner on paper, but the beneficiary gets equitable
title. They're the one who actually
gets to enjoy it. That split, that's everything.
All right, here's our game plan. First, we'll look at the basic
blueprint of a trust. Then we'll get into the nitty
gritty of how you actually build a valid 1.
After that, we'll cover the trustees all important job
description, take a quick tour of the different models you'll
run into, and then talk about why they matter so much in the
real world. OK, let's dive right into our
first section. Look, before you can ever hope
to untangle a complicated trust problem on an exam, you have to
know it's basic structure. Cold.
So let's start with that blue part.
So you've got to know the players in this game.
The settler is the creator, the trustee is the manager, the
beneficiary is the one who enjoys the goodies.
The property itself. We call that the Corpus or the
Rez. Getting this vocabulary down is
step one. Get it wrong and you're already
behind on your exam analysis. OK, so now that we know the
parts, how do we actually put them together?
You can't just wish a trust into existence.
To have a valid express trust, you have to build it on a rock
solid legal foundation and that means following some very
specific rules. OK, if you remember one thing
for your exam, make it this from the classic case Night V night.
A private express trust needs the three certainties.
Think of it like a three legged stool.
If you take away even one of those legs, the whole thing
topples over. The trust fails.
It's that simple. Certainty #1 is intention.
And let me tell you, this is a classic exam trap.
You have to be able to tell the difference between mandatory,
legally binding language and what we call precatory language,
which is just fancy lawyer talk for wishy washy words.
Saying I hope my sister uses this money for her kids.
That's just a hope. Saying I give this money to my
sister to hold and trust for her kids.
Bam, that's a duty. That difference is everything.
Next up, the second leg of the stool.
The subject matter or the res? This is just common sense.
The trustee has to know exactly what property they're supposed
to be managing. You can't have a trust over
something vague. If you see language in a fact
pattern like the bulk of my estate or most of my property,
your exam spotting alarm bells should be going off.
That's way too vague and that trust is going to fail.
And finally, the third certainty, the objects, which
just means the beneficiaries. The trustee has to know who
they're working for. Now, this doesn't mean you have
to name every single person. A class of beneficiaries like my
children or my descendants is perfectly fine.
But something super vague like my friends, a court is probably
going to say that's too uncertain to enforce.
All right, let's talk about where you are going to score the
most points on an essay exam. It's right here analyzing the
trustees duties. This is the heart of most trust
disputes. Being a trustee isn't just about
investing money. It's about a whole slate of
serious responsibilities. This is their rule book.
And listen, these are not just friendly suggestions.
These are hardcore, legally enforceable obligations.
If a trustee breaches one of these duties, they can be held
personally liable for any losses.
That means they could be paying for mistakes out of their own
pocket. The stakes are incredibly high.
Let's start with the big one, the duty of loyalty.
The absolute number one rule is that a trustee cannot engage in
self dealing. Period.
The traditional rule was unbelievably strict about this.
They called it the no further inquiry rule.
If a trustee profited from the trust, the court didn't want to
hear any excuses. The deal was off.
But you know, the modern Uniform Trust Code is a bit more
practical. It recognizes that sometimes a
transaction might be good for the trust even if the trustee
has a personal stake. So it allows for exceptions, but
only if they are clearly authorized, approved by a court,
or if all the beneficiaries give their fully informed consent.
Next up is the duty of prudence, which in modern law is all about
the prudent investor rule. And the key take away here is
that we look at the big picture. We don't judge a trustee based
on one bad investment that went S.
Instead, we look at the entire portfolio and the overall
strategy. Did they diversify?
Was their strategy reasonable for the goals of the trust?
And this part is critical. We judge their choices based on
what was known at the time, not with a benefit of 2020
hindsight. That is a huge point to make on
an exam. So we've built our trust and we
know the rules for the person driving it.
Now let's take a quick look at some of the different models
you'll see out there on the road.
The two big categories you've got to get straight are
revocable and irrevocable trusts.
A revocable trust, which you'll often hear called a living
trust, is exactly what it sounds like.
The settler can change it, amend it, or just tear it up anytime
they want. It's all about flexibility and
it's number one job is usually to avoid the cost and hassle of
probate. Now, an irrevocable trust is
basically set in stone. Once you make it, it's very hard
to undo. So why on earth would you do
that? Two huge reasons, tax planning
and asset protection. By giving up control, you can
often move the assets out of your taxable estate for good.
All right, let's do a quick lighting round of some other
terms. You'll see all the time a
testamentary trust. That's a trust that's born from
a will. It only springs into existence
after the settler dies. And inter vivo's trust?
That's just a fancy Latin term for a living trust, one created
during life. A charitable trust is for a
public charitable purpose. And then there's the spendthrift
trust, which is a fascinating tool.
It essentially builds a wall around the beneficiaries
interest to protect it from their creditors and maybe from
their own bad decisions. O let's just take a step back
for a second. Why do people go through all
this trouble? What's the real point of all
this legal engineering? Let's connect the theory to why
these things actually matter in the real world.
Honestly, the best way to think about a trust is like a Swiss
army knife for estate planning. It can do so many things.
It's most common use avoiding probate court, which can be
slow, expensive, and very public.
Trusts also offer fantastic asset protection.
An irrevocable trust can be like a fortress for your wealth
against future creditors, and privacy is a huge deal.
A will becomes a public document.
A trust keeps a family's affairs private.
And of course, trusts are absolute powerhouses for
sophisticated tax planning and for making sure assets are
managed properly for beneficiaries who might need a
helping hand. OK, so far everything we've
talked about are express trusts, the kind people create on
purpose with a formal document. But what happens when things go
wrong and there isn't a trust, but justice really demands one?
Well, that's when a court will step in and create a trust as a
remedy. Now, there are two main types
you need to know, and it's all about the difference in purpose.
First, you have a resulting trust.
This is all about the court trying to figure out what the
parties probably intended. The classic cases want to trust
fails, the property has to go somewhere, so the court says it
results back to the settler. It's like a legal return to
sender. Then you have the constructive
trust. This has nothing to do with
intent. This is a weapon a court uses to
prevent injustice. Like when someone gets property
through fraud, the court basically points at the
wrongdoer and says, congratulations, you have legal
title to that stolen property. But we are constructing a trust,
making you the trustee, and your only job is to give it back to
the person you wronged. It's a powerful tool to stop
unjust enrichment. And that's our deep dive into
the anatomy of a trust. As you're studying for your
exams, I want you to think about this question.
The trust is so much more than a stuffy legal document.
It's a radical idea. It's a legal fiction that rips
apart our most basic concept of ownership.
It forces us to ask, what does it really mean to own something?
The person whose name is on the title or the person who gets to
enjoy the benefit? The trust proves it can be both
and neither all of the same time.
Chew on that. Now go ace your exams.