1. Unit 4 – Trusts Prof. Paul Courtright

2. Unit 4 - Trusts This week, we will explore the differences between a testamentary and inter vivos trust. Our discussion tonight will center around the following concepts: What are the differences between the trusts? How are trusts created? Administered? Terminated? Is there only one type of inter vivos trust? What are the tax ramifications for the various trusts?

3. Unit 4 – Trusts -What are the differences between the trusts? There are two major classifications of trusts: Express trusts are established by voluntary action on the settlor's behalf. Implied trusts are imposed by the court, when the intent to form a trust is lacking.

4. Unit 4 – Trusts -What are the differences between the trusts? Express trusts can be: Private or public (charitable) Active or passive In an active trust the trustee is given certain powers and duties that he or she must perform for the management or administration of the trust for the benefit of the beneficiaries. In a passive trust, the trustee has minimal, formal, or mechanical duties or responsibilities to perform and basically has no administrative duties. Inter vivos (revocable and irrevocable living trusts) or testamentary.

5. Unit 4 – Trusts -What are the differences between the trusts? The Implied Trust is created by the presumed intent of the settlor, and not by actual deliberate acts by the settlor. Implied trusts are also trusts that are imposed on property by equity courts when intent is lacking. Implied trusts are further subdivided into resulting or constructive trusts. Both of these are passive trusts and are, in fact, said to be created by operation of law. Because both constructive and resulting trusts are implied by law, it is not necessary that they be in writing, even when the trust involves real property.

6. Unit 4 – Trusts - How are trusts created? A trust is formed in several different ways. 1. Through the will (testamentary trust) or 2. during the settlor's lifetime (inter vivos trust). The trust must have the required elements of a trust (the settlor, the trustee, and the corpus placed in trust) and the testate must have had the intent to create a trust. When a trust is formed in a will, the testate must comply with requirements set out in the Statute of Wills. When a testate creates an inter vivos trust, he or she must comply with requirements set out in the Statute of Frauds. Most trusts are created with the assistance of lawyers, and a document or group of documents are prepared and used to identify the settlor/trustor, trustee, and beneficiary.

7. Unit 4 – Trusts - How are trusts administered? Settlor: A settlor must own an interest in property that can be transferred. The settlor must have the power to dispose of that property and be able to enter into a valid contract. The settlor cannot be an incompetent, a minor, intoxicated, or insane. If a trust is created under duress or undue influence, it is voidable. After a settlor appoints a trustee, the settlor has no further duties, rights, or administrative responsibilities with respect to the trust property. However, the settlor may retain the right to cancel or revoke the trust. This is construed to be a revocable trust. If the settlor does not retain the right of rescission or revocation, it is an irrevocable trust.

8. Unit 4 – Trusts - How are trusts administered? Trustee: A trustee can be either the settlor or someone appointed by the settlor: a natural person or a legal entity, such as a private corporation that has been authorized to act as a trustee. The person who is named or appointed as trustee has the right to renounce or reject the position of trustee. The trustee has the responsibility of holding legal title to trust property for the benefit of another person. Any person who has the legal capacity to hold, take, and individually own property may receive trust property as a trustee. The trustee must be capable of administering the estate. A minor or incompetent person cannot be a trustee.

9. Unit 4 – Trusts - How are trusts administered? The trustee has the responsibility of carrying out fiduciary duties pertaining to the trust using diligence, skill, and prudence: to manage the trust property, carry out the terms of the trust, keep accurate trust records, preserve the trust property from loss, and collect outstanding debts.

10. Unit 4 – Trusts - How are trusts administered? A trustee can be removed from his position by an appropriate court, by the settlor, or by resignation. Some of the reasons for removal are the lack of capacity of the trustee, refusal to post bond or account for expenditures, an act which constitutes a breach of trust, long absence from the state, and showing favoritism to one of the beneficiaries. If the trustee (for whatever reason) is unable to serve, the settlor did not name an alternative trustee, and the settlor is incapable of naming a replacement trustee, a court with jurisdiction can appoint a replacement trustee upon request.

11. Unit 4 – Trusts - How are trusts terminated? Terminations - There are several ways in which trusts can be terminated. The Restatement (Second) of Trusts sets guidelines for termination of trusts.

12. Unit 4 – Trusts - How are trusts terminated? 1. Termination according to the terms of the trust or if the trust's purpose has been accomplished. 2.The trustee or beneficiaries terminate the trust if there is no further reason for the trust to continue. 3. Termination by the court or the beneficiaries if the trust’s purposes become impossible by illegality or impossibility. 4. A trust can be terminated or modified if all beneficiaries give their consent. 5. A trust can be automatically terminated or revoked upon the dissolution of marriage of spouses who originated the trust, but you should check the provisions of your state's laws.

13. Unit 4 – Trusts - How are trusts terminated? Trust termination matters are often brought before a probate court. If the court determines that a portion of the settlor's purposes for creating the trust can still be accomplished, it may rule that the trust cannot be terminated until that purpose is completed.

14. Unit 4 – Trusts - Is there only one type of inter vivos trust? A: No. There are many. They are either public or private in nature. They may be revocable or irrevocable. There are a variety of trusts that are for particular functions: spendthrift trust, marital living trust, marital life estate trust, QTIP trust, and generation skipping trusts, just to name a few.

15. Unit 4 – Trusts - What are the tax ramifications for the various trusts? Depending on the type of trust, the tax consequences can be one in which the tax liability on the trust property is passed on to those who inherit after the surviving parent dies or to grandchildren. Can you think of some examples?

16. Unit 4 Summary In sum, there are significant differences between a testamentary and inter vivos trust. The choice of one over another can have important tax and permanent consequences on the flexibility and administration of the trust. Therefore it is important to understand the types of trusts out there, the differences between the trusts, the tax consequences of each, as well as how they are created, administered, and terminated.

17. Unit 4 Conclusion Any questions on Unit 4? Upcoming for Unit 5 - Midterm Unit 5 is your Midterm Week for the class. Please submit your Assignment essays by the end of Unit 5. Your assignment is to complete and submit essays on four essay questions. Be sure to look to your reading summaries in each unit for helpful information in forming your answers. You may also use the rest of this time to review Units 1-4, catch up on any assignments or readings you may have fallen behind on, and prepare to finish out the class on a strong note! No Discussion or Quiz in Unit 5. Have a great week.