1 00:00:00,040 --> 00:00:01,920 Welcome to law school, a deep dive. 2 00:00:02,320 --> 00:00:06,160 We're tackling Trusts and estates Lecture 3, and our 3 00:00:06,160 --> 00:00:09,120 mission today is, well, it's pretty critical. 4 00:00:09,120 --> 00:00:13,080 We're making a big conceptual shift, moving beyond that death 5 00:00:13,080 --> 00:00:16,760 centric focus of wills and into the really complex sort of 6 00:00:16,760 --> 00:00:20,200 enduring architecture of trusts. Our goal is to take all these 7 00:00:20,200 --> 00:00:23,080 essential rules and principles and really lock them in for your 8 00:00:23,080 --> 00:00:24,520 next exam. That's absolutely right. 9 00:00:24,520 --> 00:00:27,200 It's a huge shift. If the first two lectures were 10 00:00:27,200 --> 00:00:31,000 about estates that one time transfer the snapshot at death, 11 00:00:31,200 --> 00:00:34,160 This is the motion picture. Trust law is all about the 12 00:00:34,160 --> 00:00:36,160 ongoing management of property over time. 13 00:00:36,160 --> 00:00:37,640 It's a completely different skill set. 14 00:00:37,640 --> 00:00:40,880 OK, so let's unpack that. With Wills, we were focused on a 15 00:00:40,880 --> 00:00:43,360 single moment, right? Did the testator have intent? 16 00:00:43,360 --> 00:00:45,680 Were the witnesses there? Historical inquiry, Exactly. 17 00:00:45,680 --> 00:00:48,440 But with trust, you're saying it demands this sustained 18 00:00:48,440 --> 00:00:50,440 attention. Why does it turn into such a 19 00:00:50,440 --> 00:00:54,120 dynamic, ongoing challenge? It's the fiduciary relationship 20 00:00:54,360 --> 00:00:57,600 that defines everything. A trust, especially an 21 00:00:57,600 --> 00:01:00,680 irrevocable 1, is like a miniature legal economy that's 22 00:01:00,680 --> 00:01:04,560 designed to last for decades. So the core analytical challenge 23 00:01:04,560 --> 00:01:07,040 and what makes these exam questions so tricky is this 24 00:01:07,040 --> 00:01:09,120 constant tension. Tension between what? 25 00:01:09,240 --> 00:01:11,760 Between the settlers original intent, which might be decades 26 00:01:11,760 --> 00:01:15,720 old, and this constant stream of intervening policy rules. 27 00:01:15,800 --> 00:01:18,160 You mean things like tax law changes? 28 00:01:18,160 --> 00:01:21,520 Tax law, Creditor rights, New state uniform acts Like the 29 00:01:21,760 --> 00:01:25,400 CUTC, it's always evolving. O The key for the learner isn't 30 00:01:25,400 --> 00:01:29,080 just knowing the parts of a trust, it's understanding how 31 00:01:29,080 --> 00:01:31,160 that whole management architecture needs to be 32 00:01:31,160 --> 00:01:33,960 constantly adjusted. Recisely, you have to understand 33 00:01:33,960 --> 00:01:37,640 modification, decanting, administration and through it 34 00:01:37,640 --> 00:01:41,280 all this strict, uncompromising adherence to fiduciary 35 00:01:41,280 --> 00:01:43,320 standards. The initial take away then is 36 00:01:43,320 --> 00:01:46,640 that trusts are a living, breathing legal machine. 37 00:01:46,640 --> 00:01:49,000 A machine in motion. You're not just analyzing its 38 00:01:49,000 --> 00:01:51,880 creation, you are testing its continuous operation. 39 00:01:51,880 --> 00:01:54,480 Against all these standards, it's a living document. 40 00:01:54,720 --> 00:01:57,440 All right, let's start with section one, trust formation and 41 00:01:57,440 --> 00:02:01,280 the fundamental classifications. In the simplest terms, the law 42 00:02:01,280 --> 00:02:04,840 sees two major groups, those created on purpose and those the 43 00:02:04,840 --> 00:02:07,160 law just. Implies exactly. 44 00:02:07,160 --> 00:02:09,919 We start with the intentional ones express trusts. 45 00:02:10,280 --> 00:02:12,840 This is where the settler makes a very clear declarations. 46 00:02:12,840 --> 00:02:15,640 They name a beneficiary, A trustee and they transfer 47 00:02:15,640 --> 00:02:17,960 property. All the basic requirements are 48 00:02:17,960 --> 00:02:19,720 met. And this is almost always a 49 00:02:19,720 --> 00:02:22,720 written document I assume. Almost always, especially if 50 00:02:22,720 --> 00:02:25,760 real property is involved, you know you have to satisfy the 51 00:02:25,760 --> 00:02:28,480 Statute of frauds. Now, some places might recognize 52 00:02:28,480 --> 00:02:32,720 oral trusts for personal property, but proving the intent 53 00:02:32,720 --> 00:02:36,480 and the terms without a writing is, well, it's an uphill battle, 54 00:02:36,600 --> 00:02:40,520 expensive, and it often fails. OK, but the real difficulty on 55 00:02:40,520 --> 00:02:43,120 an exam usually comes when the trust isn't written down. 56 00:02:43,120 --> 00:02:46,320 Or maybe an express trust fails. We're moving into implied 57 00:02:46,320 --> 00:02:48,720 trusts. Yes, and these arise strictly by 58 00:02:48,720 --> 00:02:51,880 operation of law, and you absolutely must keep the two 59 00:02:51,880 --> 00:02:54,560 types distinct, resulting and constructive. 60 00:02:54,680 --> 00:02:57,360 This is a core exam distinction. Why is it so core? 61 00:02:57,520 --> 00:03:00,720 Because the court's whole reason for imposing the trust is 62 00:03:00,720 --> 00:03:04,320 fundamentally different. Resulting trusts are all about 63 00:03:04,720 --> 00:03:09,280 resumed or inferred intention. The court isn't unishing anyone, 64 00:03:09,280 --> 00:03:12,680 it's just saying the transfer never meant for the other person 65 00:03:12,680 --> 00:03:16,600 to actually enjoy the property. So the property should result 66 00:03:16,840 --> 00:03:19,880 back to the original owner. It results back exactly. 67 00:03:20,040 --> 00:03:23,440 So the court is saying the intent here failed or it was 68 00:03:23,440 --> 00:03:25,920 unclear, so we assume the property should go back to 69 00:03:25,920 --> 00:03:29,120 whoever put it there. What are the classic triggers 70 00:03:29,120 --> 00:03:32,320 for that on an exam? 2 main fact patterns. 71 00:03:32,320 --> 00:03:33,960 First, the automatic resulting trust. 72 00:03:34,160 --> 00:03:37,200 This happens when an express trust just fails. 73 00:03:37,360 --> 00:03:39,280 Fails how? Maybe the purpose is completed, 74 00:03:39,280 --> 00:03:41,600 or there's no beneficiary, or the money runs out. 75 00:03:41,800 --> 00:03:44,760 The property just automatically goes back to the settler or 76 00:03:44,760 --> 00:03:46,440 their estate. It's almost an administrative 77 00:03:46,440 --> 00:03:47,200 correction. OK. 78 00:03:47,200 --> 00:03:49,880 And the second pattern, the one that usually involves title 79 00:03:49,880 --> 00:03:51,760 disputes. That's the purchase money 80 00:03:51,760 --> 00:03:54,600 resulting trust. This is where one person pays 81 00:03:54,600 --> 00:03:57,880 for property, but the legal title is put in someone else's 82 00:03:57,880 --> 00:04:00,000 name, like a. Parent pays for a house but puts 83 00:04:00,000 --> 00:04:02,480 it in their adult child's name. Perfect example. 84 00:04:03,520 --> 00:04:07,360 The law presumes no gift was intended, so the child is seen 85 00:04:07,360 --> 00:04:10,160 as holding that property in a resulting trust for the parent 86 00:04:10,160 --> 00:04:12,160 who paid. But that presumption can be 87 00:04:12,160 --> 00:04:14,800 rebutted. It can, but you need clear 88 00:04:14,800 --> 00:04:16,839 evidence that a gifts was actually intended. 89 00:04:16,839 --> 00:04:20,360 The key analytical cue is always intention, even if it's just 90 00:04:20,360 --> 00:04:22,079 inferred. Right now, let's contrast that 91 00:04:22,079 --> 00:04:25,000 with its polar opposite, the constructive trust. 92 00:04:25,880 --> 00:04:29,400 If a resulting trust is about correcting failed intent, what's 93 00:04:29,400 --> 00:04:31,520 the foundation for a constructive trust? 94 00:04:31,640 --> 00:04:34,320 It's not intent at all. It's equitable policy. 95 00:04:34,840 --> 00:04:36,800 A constructive trust is purely a remedy. 96 00:04:37,160 --> 00:04:40,000 The court imposes it, sometimes very forcefully, to prevent some 97 00:04:40,000 --> 00:04:42,400 kind of unconscionable outcome or a wrongful act. 98 00:04:42,880 --> 00:04:44,520 The trigger isn't failed administration. 99 00:04:44,520 --> 00:04:46,520 It's demonstrated wrong. So we're talking about 100 00:04:46,520 --> 00:04:50,320 malfeasance, fraud, breach of fiduciary duty that sort of. 101 00:04:50,320 --> 00:04:51,880 Thing Yes. Fraud, duress. 102 00:04:52,080 --> 00:04:54,600 Undue influence. A blatant breach of fiduciary 103 00:04:54,600 --> 00:04:57,000 duty. That is your undeniable cue for 104 00:04:57,000 --> 00:05:00,040 a constructive trust. For instance, if a trustee uses 105 00:05:00,040 --> 00:05:03,000 trust funds to buy a house in their own name, a court will 106 00:05:03,000 --> 00:05:05,160 immediately impose A constructive trust on that 107 00:05:05,160 --> 00:05:07,240 house. The trustee can't benefit from 108 00:05:07,240 --> 00:05:10,000 their own breach. And the goal is often preventing 109 00:05:10,000 --> 00:05:13,440 unjust enrichment. But the key is the underlying 110 00:05:13,440 --> 00:05:14,400 wrong. That's it. 111 00:05:14,680 --> 00:05:18,400 And once the constructive trust is imposed, the trustee isn't 112 00:05:18,400 --> 00:05:20,720 really a trustee. They're just a placeholder 113 00:05:21,120 --> 00:05:23,720 compelled to immediately give the property back to the 114 00:05:23,720 --> 00:05:26,520 rightful owner. It's an involuntary way to force 115 00:05:26,520 --> 00:05:29,400 restitution. Exactly so for the exam. 116 00:05:29,400 --> 00:05:32,760 Remember failed intent or unclear title. 117 00:05:33,320 --> 00:05:36,960 Think resulting trust fraud or fiduciary breach. 118 00:05:37,600 --> 00:05:41,000 Think constructive trust. And since their remedies imposed 119 00:05:41,000 --> 00:05:44,960 by a court, neither one requires a writing, they're exempt from 120 00:05:44,960 --> 00:05:47,440 the Statute of Frauds. All right, let's move from how 121 00:05:47,440 --> 00:05:48,800 they're created to how they operate. 122 00:05:49,040 --> 00:05:52,600 Revocable versus irrevocable. The Revocable Trust, the Modern 123 00:05:52,600 --> 00:05:55,240 Living Trust, has really become a centerpiece of modern estate 124 00:05:55,240 --> 00:05:56,920 planning. Because of the flexibility 125 00:05:57,320 --> 00:06:00,320 that's paramount in irrevocable trust, the settler keeps all the 126 00:06:00,320 --> 00:06:02,480 power. They can amend it, revoke it, 127 00:06:02,480 --> 00:06:04,720 change beneficiaries, swap out property. 128 00:06:04,720 --> 00:06:07,200 And because they keep that control, they're still treated 129 00:06:07,200 --> 00:06:09,920 as the owner for tax and creditor purposes during their 130 00:06:09,920 --> 00:06:10,640 life. Correct. 131 00:06:10,720 --> 00:06:12,680 The key strengths are continuity and management. 132 00:06:12,880 --> 00:06:16,440 Continuity is huge. Imagine a settler with a complex 133 00:06:16,440 --> 00:06:18,200 business. They can manage it their whole 134 00:06:18,200 --> 00:06:22,240 life and when they die the assets just bypass probate. 135 00:06:22,600 --> 00:06:26,480 That probate avoidance is the headline benefit for sure, but 136 00:06:26,680 --> 00:06:28,760 don't overlook incapacity planning. 137 00:06:29,280 --> 00:06:31,240 This might be its greatest strength. 138 00:06:31,440 --> 00:06:33,800 How so? If that same business owner 139 00:06:33,800 --> 00:06:36,840 becomes incapacitated, the successor trustee they already 140 00:06:36,840 --> 00:06:41,160 named can step in immediately. No need for a lengthy, public, 141 00:06:41,160 --> 00:06:44,520 expensive court guardianship. It's seamless and private. 142 00:06:44,560 --> 00:06:47,240 If the revocable trust is all about flexibility, the 143 00:06:47,240 --> 00:06:49,840 irrevocable trust is its rigid counterpart. 144 00:06:50,280 --> 00:06:52,840 Once it's funded, you generally can't change it, right? 145 00:06:52,920 --> 00:06:56,240 And that rigidity seems like a big constraint, but it unlocks 146 00:06:56,240 --> 00:06:58,000 some really significant benefits such. 147 00:06:58,000 --> 00:07:00,600 As robust. Protection and advanced tax 148 00:07:00,600 --> 00:07:02,720 planning. The two big strengths are asset 149 00:07:02,720 --> 00:07:05,960 protection and tax efficiency. Properly structured, the assets 150 00:07:05,960 --> 00:07:08,120 are no longer considered the settlers property, so they're 151 00:07:08,120 --> 00:07:11,240 shielded from future creditors. Subject to fraudulent conveyance 152 00:07:11,240 --> 00:07:13,520 laws, of course. And second, by getting the 153 00:07:13,520 --> 00:07:16,320 assets out of the settlers estate you minimize estate and 154 00:07:16,320 --> 00:07:19,360 give taxes. Exactly you preserve more wealth 155 00:07:19,600 --> 00:07:22,680 for the next generation and they're vital for things like 156 00:07:22,760 --> 00:07:26,000 Medicaid planning, shielding assets for long term care 157 00:07:26,000 --> 00:07:26,920 eligibility. So it's. 158 00:07:26,920 --> 00:07:30,640 A strategic choice, Flexibility and probate avoidance, you go 159 00:07:30,640 --> 00:07:33,080 revocable. Asset protection and tax 160 00:07:33,080 --> 00:07:35,640 minimization, you go irrevocable. 161 00:07:36,480 --> 00:07:39,160 This brings us to a planning tool that kind of bridges the 162 00:07:39,160 --> 00:07:43,280 gap between the will and the trust, the poor over will and. 163 00:07:43,280 --> 00:07:46,760 It's an elegant solution for, well, for human imperfection 164 00:07:46,880 --> 00:07:47,800 human. Imperfection. 165 00:07:47,800 --> 00:07:50,520 I like that because. No matter how careful you are, 166 00:07:51,120 --> 00:07:54,280 you'll forget to retitle an account or an asset pops up 167 00:07:54,360 --> 00:07:56,920 right before death. The poor over will is the safety 168 00:07:56,920 --> 00:07:59,040 net. The will names the living trust 169 00:07:59,040 --> 00:08:02,920 as its sole beneficiary. It legally pours any assets left 170 00:08:02,920 --> 00:08:04,800 out of the trust at death into the trust. 171 00:08:04,920 --> 00:08:06,800 So. The single objective here is to 172 00:08:06,800 --> 00:08:08,800 minimize what goes through probate precisely. 173 00:08:09,080 --> 00:08:12,040 The trust already holds the big assets, the house, the brokerage 174 00:08:12,040 --> 00:08:14,680 accounts, so the will itself might just govern a car or a 175 00:08:14,680 --> 00:08:16,880 small bank account. This tiny estate might even 176 00:08:16,880 --> 00:08:19,840 qualify for a faster, cheaper summary probate process. 177 00:08:20,200 --> 00:08:22,480 It's a vital protection so. What are the critical 178 00:08:22,480 --> 00:08:24,920 requirements to make a pour over will valid? 179 00:08:25,520 --> 00:08:28,760 We should probably focus on the Uniform Testamentary Additions 180 00:08:28,760 --> 00:08:32,320 to Trust ACT or Utada Utada. Is your guide here. 181 00:08:32,320 --> 00:08:35,559 It validates the transfer. For it to work, a few things 182 00:08:35,559 --> 00:08:39,000 have to be strictly true. First, the will has to clearly 183 00:08:39,000 --> 00:08:41,760 reference the trust. Second, the trust has to be 184 00:08:41,760 --> 00:08:44,760 executed before or at the same time as the will. 185 00:08:45,160 --> 00:08:47,480 That's a critical chronological requirement, and. 186 00:08:47,480 --> 00:08:49,520 Does the trust need to be funded at that point? 187 00:08:49,520 --> 00:08:52,960 No, and that's a key detail. The trust can be funded or 188 00:08:52,960 --> 00:08:55,040 unfunded when the pour over will is signed. 189 00:08:55,440 --> 00:08:58,480 You just need the legal document ready to receive assets and. 190 00:08:58,480 --> 00:09:01,920 Following Utah streamlines everything, avoiding having to 191 00:09:01,920 --> 00:09:05,040 attach the whole trust document to the will for probate it. 192 00:09:05,040 --> 00:09:08,400 Does, but be careful with amendments in some places. 193 00:09:08,400 --> 00:09:11,440 If you amend the trust after you sign the will, you might need to 194 00:09:11,440 --> 00:09:14,200 republish the will to make sure it refers to the latest version. 195 00:09:14,560 --> 00:09:17,440 If you revoke the trust entirely, the gift just lapses. 196 00:09:17,680 --> 00:09:19,960 OK. Let's shift from creation to 197 00:09:19,960 --> 00:09:23,440 administration, and specifically the massive role that 198 00:09:23,440 --> 00:09:25,920 distribution mechanics play in tax planning. 199 00:09:26,480 --> 00:09:29,600 This brings us to one of the most vital acronyms in trust 200 00:09:29,600 --> 00:09:34,720 design HEMS. HEMS. It stands for Health, Education, Maintenance 201 00:09:34,760 --> 00:09:38,200 and Support. HEMS. Exactly. 202 00:09:38,480 --> 00:09:41,680 These 4 terms form what are known as ascertainable 203 00:09:41,680 --> 00:09:44,840 standards. They are specific, objective, 204 00:09:44,840 --> 00:09:47,960 measurable guidelines that a trustee must follow when making 205 00:09:47,960 --> 00:09:50,440 distributions. They're not suggestions. 206 00:09:50,560 --> 00:09:52,360 They're defined under federal tax law. 207 00:09:52,560 --> 00:09:53,800 Let's. Break those down because 208 00:09:53,800 --> 00:09:56,400 maintenance and support seems like it could be a real trap for 209 00:09:56,400 --> 00:09:57,280 a trustee. It can. 210 00:09:57,320 --> 00:10:00,640 Be health is the most objective medical, dental, mental health, 211 00:10:00,640 --> 00:10:03,560 long term care, anything related to well-being and. 212 00:10:03,560 --> 00:10:05,640 Education is usually interpreted very broadly. 213 00:10:05,640 --> 00:10:07,600 Very. Broadly, private school, 214 00:10:07,600 --> 00:10:10,920 college, grad school, vocational training, even related costs 215 00:10:10,920 --> 00:10:12,120 like room and board. OK. 216 00:10:12,120 --> 00:10:14,120 Now for the tricky part, maintenance and support. 217 00:10:14,480 --> 00:10:17,560 The key phrase here is a custom standard of living, right? 218 00:10:17,760 --> 00:10:20,160 That is the absolutely critical operative phrase. 219 00:10:20,400 --> 00:10:23,800 It's not about mere survival. The trustee has to look at the 220 00:10:23,800 --> 00:10:27,560 beneficiaries current and prior lifestyle to see what's required 221 00:10:27,560 --> 00:10:29,160 to maintain that standard. So it. 222 00:10:29,160 --> 00:10:33,560 Covers things like rent, utilities, food, clothing, and. 223 00:10:33,560 --> 00:10:36,680 Even reasonable vacation travel if that's customary to their 224 00:10:36,680 --> 00:10:39,360 lifestyle. So if the beneficiary is used to 225 00:10:39,360 --> 00:10:43,360 living in $1,000,000 house and driving a luxury car, HEMS 226 00:10:43,360 --> 00:10:46,160 allows for distributions to maintain that as long as it's 227 00:10:46,160 --> 00:10:48,120 reasonable for the trust. Exactly. 228 00:10:48,120 --> 00:10:52,080 It's a relative standard, not an absolute 1, and it requires the 229 00:10:52,080 --> 00:10:55,000 trustee to do their due diligence, often asking for 230 00:10:55,000 --> 00:10:57,400 financial statements to justify the distributions. 231 00:10:57,880 --> 00:11:00,480 So. Why are these 4 letters hems so 232 00:11:00,480 --> 00:11:02,840 essential? Why are they the firewall of 233 00:11:02,840 --> 00:11:06,440 modern trust, planning it all? Comes down to avoiding a massive 234 00:11:06,440 --> 00:11:09,200 estate tax trap. The general power of appointment 235 00:11:09,400 --> 00:11:10,320 Let's. Unpack that. 236 00:11:10,400 --> 00:11:12,400 OK. So the IRS rule says that if a 237 00:11:12,400 --> 00:11:15,960 person, say the grantor's child is both a trustee and a 238 00:11:15,960 --> 00:11:18,640 beneficiary, they can distribute assets to themselves for any 239 00:11:18,640 --> 00:11:20,400 reason Pure. Discretion pure. 240 00:11:20,400 --> 00:11:23,200 Discretion. The IRS will treat that as if 241 00:11:23,200 --> 00:11:26,880 they own the assets outright, and when that person dies, the 242 00:11:26,880 --> 00:11:29,800 entire value of the trust could be included in their taxable 243 00:11:29,800 --> 00:11:30,520 estate. Which? 244 00:11:30,520 --> 00:11:33,240 Could trigger a massive tax bill and undo all the planning, 245 00:11:33,240 --> 00:11:35,800 right? And hemp ES is the solution. 246 00:11:36,040 --> 00:11:39,880 It prevents the power from being categorized as a general power 247 00:11:39,880 --> 00:11:43,160 of appointment because the discretion is restricted only to 248 00:11:43,160 --> 00:11:45,600 health, education, maintenance and support. 249 00:11:45,920 --> 00:11:48,520 Federal tax law specifically says this is not a general 250 00:11:48,520 --> 00:11:50,920 power. The power is limited by an 251 00:11:50,920 --> 00:11:55,440 objective external standard and that keeps the assets out of the 252 00:11:55,440 --> 00:11:57,640 trustee beneficiaries taxable estate makes. 253 00:11:57,640 --> 00:12:00,400 Perfect sense, but beyond the tax integrity, what other 254 00:12:00,400 --> 00:12:02,240 functions does hempest perform it? 255 00:12:02,240 --> 00:12:04,840 Serves at least three other critical non tax functions. 256 00:12:04,960 --> 00:12:07,320 First, creditor protection. How so? 257 00:12:07,520 --> 00:12:10,400 In many states, if a beneficiary's access is limited 258 00:12:10,400 --> 00:12:13,760 to these specific standards, creditors generally can't force 259 00:12:13,760 --> 00:12:15,600 a distribution outside of those defined. 260 00:12:15,600 --> 00:12:16,200 Needs. OK. 261 00:12:16,200 --> 00:12:19,480 What's second trustee? Guidance and accountability It 262 00:12:19,480 --> 00:12:22,840 gives the trustee a clear, objective framework It replaces 263 00:12:22,840 --> 00:12:26,000 vague terms like comfort or happiness, which just invite 264 00:12:26,000 --> 00:12:27,400 lawsuits and. The third. 265 00:12:27,720 --> 00:12:30,640 Gift tax avoidance. If a trustee can make 266 00:12:30,640 --> 00:12:34,600 distributions to others, tying that power to Hems helps prevent 267 00:12:34,600 --> 00:12:37,360 those distributions from being considered a taxable gift from 268 00:12:37,360 --> 00:12:39,640 the trustee. It's a perfect balance of 269 00:12:39,640 --> 00:12:42,800 flexibility and restriction. All right, we need to turn to a 270 00:12:42,800 --> 00:12:46,960 really technical but important planning issue, the grantor 271 00:12:46,960 --> 00:12:49,480 trust tax reimbursement dilemma this. 272 00:12:49,480 --> 00:12:52,160 Is a complex one. It usually involves an 273 00:12:52,160 --> 00:12:55,800 irrevocable grandeur trust, where by design, the grantor is 274 00:12:55,800 --> 00:12:58,120 treated as the owner for income tax purposes. 275 00:12:58,120 --> 00:13:00,280 So the. Grantor pays the income tax on 276 00:13:00,280 --> 00:13:04,160 the trust's earnings, but the assets are outside their estate 277 00:13:04,160 --> 00:13:06,240 for estate tax purposes. Exactly. 278 00:13:06,480 --> 00:13:08,920 This allows the trust to grow income tax free. 279 00:13:08,920 --> 00:13:12,560 From the trust's perspective, the problem comes when the trust 280 00:13:12,560 --> 00:13:16,000 has a huge capital gain. Say it sells a business and. 281 00:13:16,000 --> 00:13:18,960 Suddenly the grantor has a massive personal income tax bill 282 00:13:18,960 --> 00:13:20,880 on money they can't even access right. 283 00:13:21,000 --> 00:13:22,920 And while they might have planned to pay the tax, 284 00:13:22,920 --> 00:13:25,240 sometimes it's crippling. They might want the trust to 285 00:13:25,240 --> 00:13:28,240 reimburse them. The risk is that if the grantor 286 00:13:28,240 --> 00:13:30,840 has a right to reimbursement, the IRS could say that's a 287 00:13:30,840 --> 00:13:33,920 retained interest and. Pull the assets right back into 288 00:13:33,920 --> 00:13:37,040 their taxable estate. Devastating, which is why the 289 00:13:37,040 --> 00:13:40,760 IRS gave us a Safe Harbor in Revenue Ruling 2464. 290 00:13:41,280 --> 00:13:43,880 It outlines how you can have a discretionary reimbursement 291 00:13:43,880 --> 00:13:46,040 power. Let's break down the four 292 00:13:46,040 --> 00:13:47,960 conditions for that safe harbor, OK? 293 00:13:47,960 --> 00:13:51,360 First, there can be no express or implied understanding that 294 00:13:51,360 --> 00:13:53,000 the trustee will always reimburse. 295 00:13:53,280 --> 00:13:55,040 Their discretion has to be absolute. 296 00:13:55,280 --> 00:13:56,560 Second. Condition the. 297 00:13:56,560 --> 00:13:59,840 Grantor's power to remove and appoint trustees must be limited 298 00:13:59,840 --> 00:14:02,560 to independent trustees, people who aren't related or 299 00:14:02,560 --> 00:14:05,480 subordinate to them so. They can't indirectly control 300 00:14:05,480 --> 00:14:08,320 the decision, right? 3rd, the provision cannot create 301 00:14:08,320 --> 00:14:11,920 creditor access under state law. If a creditor could reach that 302 00:14:11,920 --> 00:14:14,320 reimbursement power, the whole thing fails and the. 303 00:14:14,320 --> 00:14:15,720 Last one is the most nerve wracking. 304 00:14:15,720 --> 00:14:17,200 No other facts. That's. 305 00:14:17,200 --> 00:14:19,520 The catch all? No other facts can exist that 306 00:14:19,520 --> 00:14:22,960 suggest a secret agreement, and this is the opening the IRS can 307 00:14:22,960 --> 00:14:25,560 use, especially when you consider leader laws, which. 308 00:14:25,560 --> 00:14:30,800 Brings us to the 2005 Bankruptcy Code amendment, section 548, a 309 00:14:30,800 --> 00:14:34,000 10 year look back for transfers to a self settled trust if it 310 00:14:34,000 --> 00:14:37,760 was made with actual intent to defraud creditors and this. 311 00:14:37,760 --> 00:14:39,680 Is where the safe harbor gets really murky. 312 00:14:40,040 --> 00:14:43,200 The big debate is whether just having a tax reimbursement 313 00:14:43,200 --> 00:14:47,440 clause counts as an other fact or shows actual intent to 314 00:14:47,440 --> 00:14:48,680 defraud. What's. 315 00:14:48,680 --> 00:14:50,520 The argument that it's not fraudulent. 316 00:14:51,080 --> 00:14:53,440 The argument is that the provision is there to pay a 317 00:14:53,440 --> 00:14:57,800 specific creditor, the IRS. It's an act of responsibility, 318 00:14:57,800 --> 00:15:00,400 not fraud. You're not trying to hide assets 319 00:15:00,400 --> 00:15:01,960 from creditors. You're trying to pay the 320 00:15:01,960 --> 00:15:02,880 government. But. 321 00:15:02,880 --> 00:15:05,320 The other side argues that dollars are fungible. 322 00:15:05,320 --> 00:15:07,640 Exactly. The opposing view says that 323 00:15:07,640 --> 00:15:10,920 taking money out for any reason is a retained interest. 324 00:15:11,400 --> 00:15:14,960 It overturns the common law rule against self settled spendthrift 325 00:15:14,960 --> 00:15:19,360 trusts which section 548 E was designed to combat. 326 00:15:19,560 --> 00:15:20,880 So this. Creates a huge drafting 327 00:15:20,880 --> 00:15:22,240 challenge. What are the solutions? 328 00:15:22,320 --> 00:15:23,920 Well. You can forgo the clause 329 00:15:23,920 --> 00:15:27,520 entirely and just avoid the risk, or you could include it 330 00:15:27,520 --> 00:15:30,560 and argue that 548 E is only triggered by known looming 331 00:15:30,560 --> 00:15:33,120 creditors. That's a litigation risk and. 332 00:15:33,120 --> 00:15:35,560 The third most sophisticated approach you use. 333 00:15:35,560 --> 00:15:37,640 Careful drafting. Turning on a distinction from 334 00:15:37,640 --> 00:15:40,960 the famous case Commissioner V Proctor, you create a condition 335 00:15:40,960 --> 00:15:42,240 precedent. What does that? 336 00:15:42,240 --> 00:15:44,240 Mean the. Clause states that the 337 00:15:44,240 --> 00:15:47,120 reimbursement power won't be exercised if doing so would 338 00:15:47,120 --> 00:15:48,920 create a state tax inclusion risk. 339 00:15:49,240 --> 00:15:52,440 It's a savings clause. So why does a condition 340 00:15:52,440 --> 00:15:56,440 precedent work when a condition subsequent the kind struck down 341 00:15:56,440 --> 00:15:58,960 and Proctor fails? Because a condition subsequent 342 00:15:58,960 --> 00:16:02,080 tries to undo a transfer after the IRS calls it taxable. 343 00:16:02,600 --> 00:16:05,160 A condition precedent defines the power from the very 344 00:16:05,160 --> 00:16:07,360 beginning. It sets the limits on the power 345 00:16:07,360 --> 00:16:10,520 from the moment the trust is created, excluding the specific 346 00:16:10,520 --> 00:16:12,040 power that would cause the problem. 347 00:16:12,640 --> 00:16:15,120 That distinction is pure law school mastery. 348 00:16:15,280 --> 00:16:16,360 OK. Let's move on. 349 00:16:16,480 --> 00:16:19,960 We've established trusts, our long term architectures, which 350 00:16:19,960 --> 00:16:21,400 means we need ways to change them. 351 00:16:21,960 --> 00:16:24,480 We're going to use the Connecticut Uniform Trust Code, 352 00:16:24,560 --> 00:16:29,240 or CUTC, as a framework for how modern law handles modification 353 00:16:29,240 --> 00:16:30,560 and termination. The. 354 00:16:30,720 --> 00:16:33,240 CUTC is a great model. It's mostly a default statute, 355 00:16:33,240 --> 00:16:35,360 meaning you can override it in the trust document, right? 356 00:16:35,400 --> 00:16:38,080 But has mandatory rules like the duty of good faith that you 357 00:16:38,080 --> 00:16:41,480 cannot waive and. The CUTC maintains a crucial 358 00:16:41,480 --> 00:16:44,600 split between testamentary and inter vivos trusts. 359 00:16:44,840 --> 00:16:49,160 A huge split testamentary trusts, the ones created by a 360 00:16:49,160 --> 00:16:52,280 will, are subject to mandatory court oversight. 361 00:16:53,040 --> 00:16:56,400 A trustee can't just resign, they need court approval. 362 00:16:56,400 --> 00:16:58,520 Whereas. Inter vivos or living trusts 363 00:16:58,520 --> 00:17:01,320 have much more non judicial flexibility right So if. 364 00:17:01,320 --> 00:17:03,240 You see an exam question about court supervision. 365 00:17:03,440 --> 00:17:06,599 The first question you ask is, is this a testamentary trust? 366 00:17:06,920 --> 00:17:09,200 If yes, the court is probably involved The. 367 00:17:09,200 --> 00:17:13,160 CUTC provides 5 clear judicial paths for change. 368 00:17:13,400 --> 00:17:16,599 Let's start with the first one. For unforeseen events, change 369 00:17:16,599 --> 00:17:18,599 circumstances. The Who knew path. 370 00:17:18,920 --> 00:17:22,119 This is a powerful one. It applies to any irrevocable 371 00:17:22,119 --> 00:17:24,280 trust. The court has to find two 372 00:17:24,280 --> 00:17:26,480 things. One, the circumstances were 373 00:17:26,480 --> 00:17:30,360 unanticipated by this other and two, the proposed change 374 00:17:30,360 --> 00:17:32,840 furthers the purposes of the trust and aligns with the 375 00:17:32,840 --> 00:17:34,600 sellers probable intentions. Give me. 376 00:17:34,600 --> 00:17:36,760 An example a. Trust from the 80s that says the 377 00:17:36,760 --> 00:17:40,160 trustee can only own General Motors stock if GM goes 378 00:17:40,160 --> 00:17:42,000 bankrupt. That's an unanticipated 379 00:17:42,000 --> 00:17:44,600 circumstance. A court could modify it to allow 380 00:17:44,600 --> 00:17:47,680 a diversified portfolio to preserve the trust purpose and 381 00:17:47,680 --> 00:17:49,040 you. Don't need all the beneficiaries 382 00:17:49,040 --> 00:17:51,080 to agree, no. The court can override 383 00:17:51,080 --> 00:17:54,600 objections, OK. Path to is more relaxed consent 384 00:17:54,600 --> 00:17:57,800 of all or almost all beneficiaries, right? 385 00:17:57,800 --> 00:18:01,200 Here, the change just has to be not inconsistent with the 386 00:18:01,200 --> 00:18:04,000 material purpose of the trust, a much lower bar. 387 00:18:04,480 --> 00:18:08,280 And even if only almost all beneficiaries consent, the court 388 00:18:08,280 --> 00:18:10,920 can approve it if the non consenting parties are 389 00:18:10,920 --> 00:18:12,440 adequately protected. What? 390 00:18:12,440 --> 00:18:15,600 About a spend thrift provision, is that automatically a material 391 00:18:15,600 --> 00:18:16,720 purpose? No. 392 00:18:17,520 --> 00:18:21,080 Under the CUTC, A spendthrift clause is not automatically a 393 00:18:21,080 --> 00:18:23,600 material purpose. The court loose to see if the 394 00:18:23,600 --> 00:18:25,280 settler specifically said it was. 395 00:18:25,800 --> 00:18:28,640 This is a big change from old common law path. 3 is the 396 00:18:28,640 --> 00:18:30,840 cleanest. It seemed like a good idea at 397 00:18:30,840 --> 00:18:33,360 the time. This only applies to new trusts 398 00:18:33,360 --> 00:18:35,320 where the settler is still alive and competent. 399 00:18:35,520 --> 00:18:38,040 If the settler and all the beneficiaries agree, they can 400 00:18:38,040 --> 00:18:41,040 modify or terminate the trust for any reason, even if it's 401 00:18:41,040 --> 00:18:43,000 inconsistent with a material purpose and. 402 00:18:43,000 --> 00:18:47,240 Path 4 is for human error modification to correct mistakes 403 00:18:47,240 --> 00:18:50,200 or the OOPS path. Right here the petitioner has to 404 00:18:50,200 --> 00:18:53,200 prove the settlers original intention by clear and 405 00:18:53,200 --> 00:18:55,440 convincing evidence of very high standard. 406 00:18:55,800 --> 00:18:59,480 And the mistake could be a typo, A scrivener's error, or a 407 00:18:59,480 --> 00:19:01,880 mistake of fact or law that the settler made. 408 00:19:02,040 --> 00:19:04,640 Exactly. And finally, path 5 is 409 00:19:04,640 --> 00:19:08,280 specialized for taxes modification for tax objectives. 410 00:19:08,720 --> 00:19:11,840 This allows a trustee or beneficiary to petition to 411 00:19:11,840 --> 00:19:15,240 modify a trust to achieve the settlers tax goals as long as 412 00:19:15,240 --> 00:19:17,440 it's not contrary to their probable intent. 413 00:19:17,600 --> 00:19:20,760 Things like fixing a marital deduction or preserving a GST 414 00:19:20,760 --> 00:19:22,960 exemption while the. Courts provide those paths. 415 00:19:23,000 --> 00:19:25,920 Modern law really favors non judicial solutions. 416 00:19:26,320 --> 00:19:28,720 Let's talk about the non judicial settlement agreement or 417 00:19:28,720 --> 00:19:32,120 NJSA the. NGSA is a key tool, especially 418 00:19:32,120 --> 00:19:35,040 for inter vivos trusts. It lets you resolve almost any 419 00:19:35,040 --> 00:19:37,960 matter so long as it doesn't violate a material purpose and 420 00:19:37,960 --> 00:19:39,440 it's something a court could have approved. 421 00:19:39,440 --> 00:19:41,240 What? Kinds of things can you resolve 422 00:19:41,240 --> 00:19:43,880 with an NJSA. Interpreting ambiguous terms, 423 00:19:43,880 --> 00:19:46,560 approving an accounting, granting the trustee new powers, 424 00:19:47,040 --> 00:19:49,280 all kinds of things that save time and legal fees. 425 00:19:49,560 --> 00:19:51,360 A. Crucial part of this is virtual 426 00:19:51,360 --> 00:19:53,920 representation. You have to be able to bind 427 00:19:53,960 --> 00:19:56,360 future beneficiaries. Absolutely. 428 00:19:56,880 --> 00:19:59,440 Virtual representation is the legal mechanism that allows a 429 00:19:59,440 --> 00:20:04,120 current beneficiary to represent and bind the interests of future 430 00:20:04,120 --> 00:20:08,320 unborn or minor beneficiaries who have substantially identical 431 00:20:08,320 --> 00:20:10,520 interests like. A parent representing their 432 00:20:10,520 --> 00:20:11,920 child. Exactly. 433 00:20:12,080 --> 00:20:15,640 Without it, you could never get everyone's consent and the NJSA 434 00:20:15,640 --> 00:20:18,120 would be useless. Beyond formal agreements, we 435 00:20:18,120 --> 00:20:21,840 have other modification tools, decanting division and merger. 436 00:20:22,200 --> 00:20:25,760 What's the key to being able to decant assets into a new trust? 437 00:20:26,240 --> 00:20:29,240 It almost always hinges on the first trust's invasion power. 438 00:20:29,680 --> 00:20:33,120 The trustee usually needs an absolute, purely discretionary 439 00:20:33,120 --> 00:20:35,920 power to invade principle. If it's limited by hams, 440 00:20:35,920 --> 00:20:38,320 decanting is usually off the table and there are limits. 441 00:20:38,360 --> 00:20:40,000 Right. You can't just add new 442 00:20:40,000 --> 00:20:41,600 beneficiaries, correct? And you can't eliminate A 443 00:20:41,600 --> 00:20:44,800 beneficiary's presently exercisable rights like right to 444 00:20:44,800 --> 00:20:48,560 withdraw assets at age 35 and. Merger and division, these are. 445 00:20:48,560 --> 00:20:50,600 Mostly statutory tools for tax planning. 446 00:20:51,080 --> 00:20:53,600 Division is common for separating assets for GST tax 447 00:20:53,600 --> 00:20:56,840 purposes or for children with different goals, and again for 448 00:20:56,840 --> 00:20:59,160 testamentary trusts. You'll likely need court 449 00:20:59,160 --> 00:21:01,240 approval, but. All this flexibility comes with 450 00:21:01,240 --> 00:21:03,400 a big warning label from the IRS. 451 00:21:03,720 --> 00:21:06,760 What are the tax consequences of modification the. 452 00:21:06,760 --> 00:21:09,320 Risk can be severe. The biggest one for 453 00:21:09,320 --> 00:21:13,800 beneficiaries is gift tax risk. If a beneficiary consents to a 454 00:21:13,800 --> 00:21:17,040 change that diminishes their interests, like giving up a 455 00:21:17,040 --> 00:21:20,920 right to income, the IRS might say they've made a taxable gift 456 00:21:20,960 --> 00:21:22,720 to the other beneficiaries. When? 457 00:21:22,720 --> 00:21:24,440 Is that risk highest? It's. 458 00:21:24,440 --> 00:21:27,840 Highest When state law gives the beneficiary a right to object 459 00:21:27,840 --> 00:21:30,880 and they don't exercise it, their passive consent can be 460 00:21:30,880 --> 00:21:32,600 seen as a transfer. And what about the? 461 00:21:32,600 --> 00:21:37,480 Impact on a trust's existing tax status like a grandfather GST 462 00:21:37,480 --> 00:21:40,600 exempt trust you. Have to be incredibly careful. 463 00:21:40,880 --> 00:21:44,040 A modification can't shift beneficial interest to a lower 464 00:21:44,040 --> 00:21:46,400 generation or extend the vesting period. 465 00:21:46,880 --> 00:21:49,800 If it does, you could lose that valuable grandfathered status. 466 00:21:49,880 --> 00:21:52,400 It requires meticulous attention to the regulations. 467 00:21:52,480 --> 00:21:53,960 OK. Let's get to our final section, 468 00:21:54,440 --> 00:21:57,400 the duties of the trustee and how they can protect themselves 469 00:21:57,400 --> 00:22:00,280 from liability these. Duties are the foundation of the 470 00:22:00,280 --> 00:22:02,840 whole operation. Once you accept the job, you 471 00:22:02,840 --> 00:22:05,400 have to administer the trust in good faith, according to its 472 00:22:05,400 --> 00:22:07,440 terms, the law, and the seller's intent. 473 00:22:07,640 --> 00:22:09,240 Let's. Run through the key duties 474 00:22:09,240 --> 00:22:11,200 first. The overarching duty of 475 00:22:11,200 --> 00:22:13,760 administration that binds everything second. 476 00:22:14,000 --> 00:22:17,240 The most critical one, the duty of loyalty, non. 477 00:22:17,240 --> 00:22:20,080 Negotiable. You must act solely in the 478 00:22:20,080 --> 00:22:24,120 interest of the beneficiaries. Avoid all conflicts of interest. 479 00:22:24,120 --> 00:22:26,960 No self dealing. The presumption is always 480 00:22:26,960 --> 00:22:30,320 against the trustee in a conflicted transaction. 3rd, the 481 00:22:30,360 --> 00:22:33,720 duty of impartiality. This is key when you have 482 00:22:33,720 --> 00:22:36,000 different classes of beneficiaries you have. 483 00:22:36,000 --> 00:22:39,440 To be equitable, you can't favor the current income beneficiary 484 00:22:39,600 --> 00:22:41,640 at the expense of the remainder beneficiaries. 485 00:22:41,920 --> 00:22:44,440 This really drives your investment strategy and. 4th 486 00:22:44,760 --> 00:22:48,280 prudent administration you have. To use the skill and care of a 487 00:22:48,280 --> 00:22:51,960 reasonable person. And the CUTC gives trustees 488 00:22:51,960 --> 00:22:56,240 incredibly broad default powers which just reinforces the high 489 00:22:56,240 --> 00:22:58,120 standard of care required to exercise them. 490 00:22:58,120 --> 00:23:00,040 The key part of. Accountability is keeping 491 00:23:00,040 --> 00:23:03,920 beneficiaries informed. The CUTC draws a sharp line 492 00:23:03,920 --> 00:23:06,920 between notice duties you can wave and those you can't. 493 00:23:07,040 --> 00:23:07,840 This. Is vital. 494 00:23:08,240 --> 00:23:12,480 The mandatory rules, the ones you absolutely cannot wave, are 495 00:23:12,480 --> 00:23:15,880 few but critical. They include the duty to notify 496 00:23:15,880 --> 00:23:19,160 qualified beneficiaries that the trust exists, who the trustee 497 00:23:19,160 --> 00:23:22,760 is, and the right to a report. But the most important non 498 00:23:22,760 --> 00:23:26,960 waivable duty is to respond to a beneficiary's reasonable request 499 00:23:26,960 --> 00:23:30,520 for information. So even in a silent trust, a 500 00:23:30,520 --> 00:23:33,840 beneficiary eventually gets the right to ask questions and get 501 00:23:33,840 --> 00:23:35,280 answers. Exactly. 502 00:23:35,520 --> 00:23:38,280 The rules you can waive are generally about how proactive 503 00:23:38,280 --> 00:23:41,160 the trustee has to be. Things like sending out annual 504 00:23:41,160 --> 00:23:44,640 reports without being asked. This allows for privacy, but not 505 00:23:44,640 --> 00:23:47,560 total secrecy given. All these standards trustees 506 00:23:47,560 --> 00:23:51,200 face huge personal liability. How can they protect themselves? 507 00:23:51,440 --> 00:23:52,400 What? The trust can have an 508 00:23:52,400 --> 00:23:54,240 exculpation clause, but they have limits. 509 00:23:54,520 --> 00:23:56,960 They're unenforceable if the breach was committed in bad 510 00:23:56,960 --> 00:23:59,120 faith or with reckless indifference. 511 00:23:59,440 --> 00:24:02,040 The law won't protect a trustee who is grossly negligent. 512 00:24:02,240 --> 00:24:04,760 The. 2nd and often easiest, protection comes from the 513 00:24:04,760 --> 00:24:08,840 beneficiaries themselves, right? Consent, release or ratification 514 00:24:09,600 --> 00:24:12,480 A trustee is protected if the beneficiary agreed to the action 515 00:24:12,480 --> 00:24:16,120 beforehand, release them from liability, or approved it after 516 00:24:16,120 --> 00:24:18,160 the fact but. There's a big exception. 517 00:24:18,440 --> 00:24:21,120 A huge one. The protection fails if the 518 00:24:21,120 --> 00:24:24,520 consent was improperly induced, or if the beneficiary didn't 519 00:24:24,520 --> 00:24:26,480 know their rights or the material facts. 520 00:24:27,040 --> 00:24:30,000 And for testamentary trusts, this isn't enough. 521 00:24:30,480 --> 00:24:32,520 You still need a judicial decree there. 522 00:24:32,520 --> 00:24:35,320 Are also protections for third parties dealing with the trust? 523 00:24:35,320 --> 00:24:37,560 Yes. Someone like a bank or a title 524 00:24:37,560 --> 00:24:41,680 company is protected if they act in good faith without knowing 525 00:24:41,680 --> 00:24:43,600 the trustee is exceeding their powers. 526 00:24:43,760 --> 00:24:46,200 They don't have to launch a full investigation and that. 527 00:24:46,200 --> 00:24:49,640 Leads to the final protection, the certification of trust, 528 00:24:49,640 --> 00:24:51,120 which is. Really a privacy tool. 529 00:24:51,480 --> 00:24:55,400 It lets the trustee give key information, who the settler is, 530 00:24:55,400 --> 00:24:58,400 what the powers are to a third party instead of the entire 531 00:24:58,400 --> 00:25:01,280 trust document. It keeps the financial details 532 00:25:01,280 --> 00:25:03,920 private while allowing business to get done This. 533 00:25:03,920 --> 00:25:06,760 Deep dive really shows that mastering trust law is about 534 00:25:06,760 --> 00:25:09,160 mastering procedure and balancing interests. 535 00:25:09,520 --> 00:25:13,200 We've seen the critical tools AMS for tax integrity to avoid 536 00:25:13,200 --> 00:25:16,160 that general power of appointment trap and the careful 537 00:25:16,160 --> 00:25:19,360 balancing act of modification under the CUTC with its five 538 00:25:19,360 --> 00:25:23,280 distinct judicial paths and. We've seen how vital procedure 539 00:25:23,280 --> 00:25:27,440 is for trustee protection, getting informed consent under 540 00:25:27,440 --> 00:25:32,520 Section 74, understanding the limits of exculpation or using a 541 00:25:32,520 --> 00:25:35,680 certification of trust. The practitioner has to be 542 00:25:35,680 --> 00:25:38,480 meticulous. The ultimate synthesis here is 543 00:25:38,480 --> 00:25:41,920 that while an irrevocable trust is theoretically set in stone, 544 00:25:42,200 --> 00:25:44,760 modern law recognizes that change is inevitable. 545 00:25:45,080 --> 00:25:48,000 The challenge is knowing how to use these modification pathways 546 00:25:48,000 --> 00:25:51,040 to preserve the settlers intent in a changing world and. 547 00:25:51,040 --> 00:25:53,760 That raises the most important question for you, the learner. 548 00:25:53,960 --> 00:25:57,000 As you prepare for your exam, you have to recognize the 549 00:25:57,000 --> 00:25:58,600 foundation of the courts intervention. 550 00:25:59,200 --> 00:26:03,040 When you read a fact pattern, you must ask is the court acting 551 00:26:03,040 --> 00:26:06,440 based on the settlers presumed or failed intent like in a 552 00:26:06,440 --> 00:26:08,200 resulting trust or a reformation? 553 00:26:08,560 --> 00:26:11,680 Or is it acting based on overriding equitable policy like 554 00:26:11,680 --> 00:26:15,080 in a constructive trust or the Cutcs mandatory rules because. 555 00:26:15,080 --> 00:26:17,960 The entire analysis, the standard of proof, the remedy 556 00:26:17,960 --> 00:26:20,640 changes completely depending on whether the foundation is intent 557 00:26:20,640 --> 00:26:22,200 or policy. It changes everything. 558 00:26:22,320 --> 00:26:25,120 A perfect final distinction to close the books on Lecture 3. 559 00:26:25,440 --> 00:26:28,840 Welcome. To law school a deep dive today 560 00:26:28,840 --> 00:26:31,600 we we are tearing down the concept of a trust and building 561 00:26:31,600 --> 00:26:35,760 it back U piece by piece. My goal is simle by the end of 562 00:26:35,760 --> 00:26:38,280 this, you're not only going to have the key rules you need to 563 00:26:38,280 --> 00:26:41,760 crush your exams, but you'll actually get why this thing is 564 00:26:41,760 --> 00:26:43,680 such a powerhouse in the legal world. 565 00:26:44,240 --> 00:26:46,480 O let's get into the anatomy of a trust. 566 00:26:47,200 --> 00:26:50,080 So let's kick things off with this quote from the legendary 567 00:26:50,080 --> 00:26:53,440 legal scholar Austin Scott. And what's so powerful here is 568 00:26:53,440 --> 00:26:56,120 that he's not just saying trusts are kind of useful. 569 00:26:56,360 --> 00:26:58,960 No, he's saying they're one of the greatest legal inventions 570 00:26:59,160 --> 00:27:01,480 ever. This isn't just another contract 571 00:27:01,480 --> 00:27:04,000 or a will. It's a revolutionary idea that 572 00:27:04,000 --> 00:27:07,320 completely changes the game of what it means to own property. 573 00:27:08,120 --> 00:27:11,800 OK, so at its absolute core, a trust is a three-way 574 00:27:11,800 --> 00:27:13,920 relationship that does something kind of brilliant. 575 00:27:14,200 --> 00:27:17,720 It splits ownership in two. You have the settler who creates 576 00:27:17,720 --> 00:27:20,600 it, you have the trustee who manages it, and you have the 577 00:27:20,600 --> 00:27:23,080 beneficiary who, well, gets the benefits. 578 00:27:23,560 --> 00:27:25,280 Here's the magic trick you have to understand. 579 00:27:25,640 --> 00:27:28,120 The trustee gets what's called legal title. 580 00:27:28,240 --> 00:27:31,480 They're the owner on paper, but the beneficiary gets equitable 581 00:27:31,480 --> 00:27:33,160 title. They're the one who actually 582 00:27:33,160 --> 00:27:36,200 gets to enjoy it. That split, that's everything. 583 00:27:37,280 --> 00:27:40,560 All right, here's our game plan. First, we'll look at the basic 584 00:27:40,560 --> 00:27:43,080 blueprint of a trust. Then we'll get into the nitty 585 00:27:43,080 --> 00:27:45,240 gritty of how you actually build a valid 1. 586 00:27:45,560 --> 00:27:48,240 After that, we'll cover the trustees all important job 587 00:27:48,240 --> 00:27:50,760 description, take a quick tour of the different models you'll 588 00:27:50,760 --> 00:27:53,520 run into, and then talk about why they matter so much in the 589 00:27:53,520 --> 00:27:57,040 real world. OK, let's dive right into our 590 00:27:57,040 --> 00:27:59,640 first section. Look, before you can ever hope 591 00:27:59,640 --> 00:28:02,960 to untangle a complicated trust problem on an exam, you have to 592 00:28:02,960 --> 00:28:04,800 know it's basic structure. Cold. 593 00:28:04,960 --> 00:28:06,240 So let's start with that blue part. 594 00:28:07,200 --> 00:28:09,640 So you've got to know the players in this game. 595 00:28:09,840 --> 00:28:13,280 The settler is the creator, the trustee is the manager, the 596 00:28:13,280 --> 00:28:15,720 beneficiary is the one who enjoys the goodies. 597 00:28:16,040 --> 00:28:18,800 The property itself. We call that the Corpus or the 598 00:28:18,800 --> 00:28:21,240 Rez. Getting this vocabulary down is 599 00:28:21,240 --> 00:28:23,760 step one. Get it wrong and you're already 600 00:28:23,760 --> 00:28:27,800 behind on your exam analysis. OK, so now that we know the 601 00:28:27,800 --> 00:28:30,200 parts, how do we actually put them together? 602 00:28:30,520 --> 00:28:32,880 You can't just wish a trust into existence. 603 00:28:33,360 --> 00:28:36,360 To have a valid express trust, you have to build it on a rock 604 00:28:36,360 --> 00:28:39,400 solid legal foundation and that means following some very 605 00:28:39,400 --> 00:28:42,680 specific rules. OK, if you remember one thing 606 00:28:42,680 --> 00:28:46,480 for your exam, make it this from the classic case Night V night. 607 00:28:46,800 --> 00:28:50,160 A private express trust needs the three certainties. 608 00:28:50,440 --> 00:28:52,320 Think of it like a three legged stool. 609 00:28:52,600 --> 00:28:55,520 If you take away even one of those legs, the whole thing 610 00:28:55,520 --> 00:28:57,440 topples over. The trust fails. 611 00:28:57,640 --> 00:29:01,040 It's that simple. Certainty #1 is intention. 612 00:29:01,040 --> 00:29:03,640 And let me tell you, this is a classic exam trap. 613 00:29:03,920 --> 00:29:06,440 You have to be able to tell the difference between mandatory, 614 00:29:06,440 --> 00:29:09,600 legally binding language and what we call precatory language, 615 00:29:09,720 --> 00:29:12,280 which is just fancy lawyer talk for wishy washy words. 616 00:29:12,520 --> 00:29:14,880 Saying I hope my sister uses this money for her kids. 617 00:29:15,000 --> 00:29:17,480 That's just a hope. Saying I give this money to my 618 00:29:17,480 --> 00:29:19,560 sister to hold and trust for her kids. 619 00:29:19,600 --> 00:29:22,520 Bam, that's a duty. That difference is everything. 620 00:29:23,120 --> 00:29:25,240 Next up, the second leg of the stool. 621 00:29:25,360 --> 00:29:29,400 The subject matter or the res? This is just common sense. 622 00:29:29,600 --> 00:29:32,760 The trustee has to know exactly what property they're supposed 623 00:29:32,760 --> 00:29:35,360 to be managing. You can't have a trust over 624 00:29:35,560 --> 00:29:38,160 something vague. If you see language in a fact 625 00:29:38,160 --> 00:29:41,680 pattern like the bulk of my estate or most of my property, 626 00:29:41,920 --> 00:29:44,240 your exam spotting alarm bells should be going off. 627 00:29:44,560 --> 00:29:46,760 That's way too vague and that trust is going to fail. 628 00:29:47,520 --> 00:29:50,520 And finally, the third certainty, the objects, which 629 00:29:50,520 --> 00:29:53,800 just means the beneficiaries. The trustee has to know who 630 00:29:53,800 --> 00:29:56,360 they're working for. Now, this doesn't mean you have 631 00:29:56,360 --> 00:30:00,400 to name every single person. A class of beneficiaries like my 632 00:30:00,400 --> 00:30:03,400 children or my descendants is perfectly fine. 633 00:30:03,720 --> 00:30:07,280 But something super vague like my friends, a court is probably 634 00:30:07,280 --> 00:30:09,360 going to say that's too uncertain to enforce. 635 00:30:10,240 --> 00:30:12,920 All right, let's talk about where you are going to score the 636 00:30:12,920 --> 00:30:16,360 most points on an essay exam. It's right here analyzing the 637 00:30:16,360 --> 00:30:19,400 trustees duties. This is the heart of most trust 638 00:30:19,400 --> 00:30:22,040 disputes. Being a trustee isn't just about 639 00:30:22,040 --> 00:30:24,040 investing money. It's about a whole slate of 640 00:30:24,040 --> 00:30:26,880 serious responsibilities. This is their rule book. 641 00:30:27,840 --> 00:30:30,280 And listen, these are not just friendly suggestions. 642 00:30:30,560 --> 00:30:34,200 These are hardcore, legally enforceable obligations. 643 00:30:34,560 --> 00:30:37,880 If a trustee breaches one of these duties, they can be held 644 00:30:37,880 --> 00:30:40,440 personally liable for any losses. 645 00:30:40,720 --> 00:30:42,840 That means they could be paying for mistakes out of their own 646 00:30:42,840 --> 00:30:45,400 pocket. The stakes are incredibly high. 647 00:30:46,080 --> 00:30:49,480 Let's start with the big one, the duty of loyalty. 648 00:30:50,000 --> 00:30:53,560 The absolute number one rule is that a trustee cannot engage in 649 00:30:53,560 --> 00:30:55,040 self dealing. Period. 650 00:30:55,360 --> 00:30:58,080 The traditional rule was unbelievably strict about this. 651 00:30:58,280 --> 00:31:00,480 They called it the no further inquiry rule. 652 00:31:00,680 --> 00:31:03,440 If a trustee profited from the trust, the court didn't want to 653 00:31:03,440 --> 00:31:05,440 hear any excuses. The deal was off. 654 00:31:06,000 --> 00:31:08,520 But you know, the modern Uniform Trust Code is a bit more 655 00:31:08,520 --> 00:31:10,680 practical. It recognizes that sometimes a 656 00:31:10,680 --> 00:31:13,480 transaction might be good for the trust even if the trustee 657 00:31:13,480 --> 00:31:16,200 has a personal stake. So it allows for exceptions, but 658 00:31:16,240 --> 00:31:18,960 only if they are clearly authorized, approved by a court, 659 00:31:19,200 --> 00:31:22,080 or if all the beneficiaries give their fully informed consent. 660 00:31:22,960 --> 00:31:26,600 Next up is the duty of prudence, which in modern law is all about 661 00:31:26,600 --> 00:31:29,560 the prudent investor rule. And the key take away here is 662 00:31:29,560 --> 00:31:32,520 that we look at the big picture. We don't judge a trustee based 663 00:31:32,520 --> 00:31:34,440 on one bad investment that went S. 664 00:31:34,680 --> 00:31:37,560 Instead, we look at the entire portfolio and the overall 665 00:31:37,560 --> 00:31:39,160 strategy. Did they diversify? 666 00:31:39,160 --> 00:31:41,280 Was their strategy reasonable for the goals of the trust? 667 00:31:41,520 --> 00:31:44,560 And this part is critical. We judge their choices based on 668 00:31:44,560 --> 00:31:47,560 what was known at the time, not with a benefit of 2020 669 00:31:47,560 --> 00:31:49,400 hindsight. That is a huge point to make on 670 00:31:49,400 --> 00:31:52,360 an exam. So we've built our trust and we 671 00:31:52,360 --> 00:31:54,000 know the rules for the person driving it. 672 00:31:54,200 --> 00:31:56,480 Now let's take a quick look at some of the different models 673 00:31:56,480 --> 00:31:57,600 you'll see out there on the road. 674 00:31:58,280 --> 00:32:00,640 The two big categories you've got to get straight are 675 00:32:00,640 --> 00:32:02,720 revocable and irrevocable trusts. 676 00:32:02,920 --> 00:32:05,280 A revocable trust, which you'll often hear called a living 677 00:32:05,280 --> 00:32:07,160 trust, is exactly what it sounds like. 678 00:32:07,360 --> 00:32:10,600 The settler can change it, amend it, or just tear it up anytime 679 00:32:10,600 --> 00:32:12,640 they want. It's all about flexibility and 680 00:32:12,640 --> 00:32:15,400 it's number one job is usually to avoid the cost and hassle of 681 00:32:15,400 --> 00:32:17,960 probate. Now, an irrevocable trust is 682 00:32:17,960 --> 00:32:20,800 basically set in stone. Once you make it, it's very hard 683 00:32:20,800 --> 00:32:22,440 to undo. So why on earth would you do 684 00:32:22,440 --> 00:32:25,040 that? Two huge reasons, tax planning 685 00:32:25,080 --> 00:32:27,680 and asset protection. By giving up control, you can 686 00:32:27,680 --> 00:32:30,280 often move the assets out of your taxable estate for good. 687 00:32:30,840 --> 00:32:33,000 All right, let's do a quick lighting round of some other 688 00:32:33,000 --> 00:32:34,720 terms. You'll see all the time a 689 00:32:34,720 --> 00:32:37,360 testamentary trust. That's a trust that's born from 690 00:32:37,360 --> 00:32:39,360 a will. It only springs into existence 691 00:32:39,360 --> 00:32:42,320 after the settler dies. And inter vivo's trust? 692 00:32:42,560 --> 00:32:45,840 That's just a fancy Latin term for a living trust, one created 693 00:32:45,840 --> 00:32:48,280 during life. A charitable trust is for a 694 00:32:48,280 --> 00:32:51,360 public charitable purpose. And then there's the spendthrift 695 00:32:51,360 --> 00:32:53,240 trust, which is a fascinating tool. 696 00:32:53,640 --> 00:32:55,920 It essentially builds a wall around the beneficiaries 697 00:32:55,920 --> 00:32:58,960 interest to protect it from their creditors and maybe from 698 00:32:58,960 --> 00:33:02,480 their own bad decisions. O let's just take a step back 699 00:33:02,480 --> 00:33:05,120 for a second. Why do people go through all 700 00:33:05,120 --> 00:33:07,280 this trouble? What's the real point of all 701 00:33:07,280 --> 00:33:10,240 this legal engineering? Let's connect the theory to why 702 00:33:10,240 --> 00:33:12,800 these things actually matter in the real world. 703 00:33:13,680 --> 00:33:16,520 Honestly, the best way to think about a trust is like a Swiss 704 00:33:16,520 --> 00:33:19,880 army knife for estate planning. It can do so many things. 705 00:33:20,040 --> 00:33:22,920 It's most common use avoiding probate court, which can be 706 00:33:22,920 --> 00:33:25,360 slow, expensive, and very public. 707 00:33:25,800 --> 00:33:28,240 Trusts also offer fantastic asset protection. 708 00:33:28,520 --> 00:33:31,160 An irrevocable trust can be like a fortress for your wealth 709 00:33:31,160 --> 00:33:34,360 against future creditors, and privacy is a huge deal. 710 00:33:34,680 --> 00:33:36,280 A will becomes a public document. 711 00:33:36,520 --> 00:33:38,360 A trust keeps a family's affairs private. 712 00:33:38,840 --> 00:33:41,360 And of course, trusts are absolute powerhouses for 713 00:33:41,360 --> 00:33:44,040 sophisticated tax planning and for making sure assets are 714 00:33:44,040 --> 00:33:46,240 managed properly for beneficiaries who might need a 715 00:33:46,240 --> 00:33:48,760 helping hand. OK, so far everything we've 716 00:33:48,760 --> 00:33:51,800 talked about are express trusts, the kind people create on 717 00:33:51,800 --> 00:33:54,800 purpose with a formal document. But what happens when things go 718 00:33:54,800 --> 00:33:57,880 wrong and there isn't a trust, but justice really demands one? 719 00:33:58,200 --> 00:34:01,080 Well, that's when a court will step in and create a trust as a 720 00:34:01,080 --> 00:34:03,400 remedy. Now, there are two main types 721 00:34:03,400 --> 00:34:05,920 you need to know, and it's all about the difference in purpose. 722 00:34:06,240 --> 00:34:07,800 First, you have a resulting trust. 723 00:34:08,199 --> 00:34:10,120 This is all about the court trying to figure out what the 724 00:34:10,120 --> 00:34:13,040 parties probably intended. The classic cases want to trust 725 00:34:13,040 --> 00:34:15,880 fails, the property has to go somewhere, so the court says it 726 00:34:15,880 --> 00:34:18,600 results back to the settler. It's like a legal return to 727 00:34:18,600 --> 00:34:20,320 sender. Then you have the constructive 728 00:34:20,320 --> 00:34:21,920 trust. This has nothing to do with 729 00:34:21,920 --> 00:34:24,080 intent. This is a weapon a court uses to 730 00:34:24,080 --> 00:34:26,400 prevent injustice. Like when someone gets property 731 00:34:26,400 --> 00:34:28,400 through fraud, the court basically points at the 732 00:34:28,400 --> 00:34:31,159 wrongdoer and says, congratulations, you have legal 733 00:34:31,159 --> 00:34:34,159 title to that stolen property. But we are constructing a trust, 734 00:34:34,159 --> 00:34:37,280 making you the trustee, and your only job is to give it back to 735 00:34:37,280 --> 00:34:39,960 the person you wronged. It's a powerful tool to stop 736 00:34:39,960 --> 00:34:43,040 unjust enrichment. And that's our deep dive into 737 00:34:43,040 --> 00:34:45,760 the anatomy of a trust. As you're studying for your 738 00:34:45,760 --> 00:34:47,800 exams, I want you to think about this question. 739 00:34:48,280 --> 00:34:51,239 The trust is so much more than a stuffy legal document. 740 00:34:51,760 --> 00:34:54,840 It's a radical idea. It's a legal fiction that rips 741 00:34:54,840 --> 00:34:57,320 apart our most basic concept of ownership. 742 00:34:57,840 --> 00:35:01,600 It forces us to ask, what does it really mean to own something? 743 00:35:01,960 --> 00:35:04,600 The person whose name is on the title or the person who gets to 744 00:35:04,600 --> 00:35:07,440 enjoy the benefit? The trust proves it can be both 745 00:35:07,720 --> 00:35:09,680 and neither all of the same time. 746 00:35:09,960 --> 00:35:12,360 Chew on that. Now go ace your exams.