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Trusts
Creation, Types & Characteristics
Introduction
Trust, generally speaking, is device whereby trustee manages property
for one or more beneficiaries (Bs).
Trustee has legal title to property & duty to manage it for B. Trustee
must have at least one active duty for trust to arise.
B, for whom trustee holds & manages property, owns equitable interest &
has personal right to sue trustee for breach of duty.
Neither trustee nor B owns property to exclusion of other, but each owns
a different interest in the property.
Trust consists of 3 parties:
- settlor
- trustee
- B
One person can wear all three hats, as long as there is one other B who
keeps trustee accountable.

Settlor
*
*Settlor is person who creates a trust. May be created during
settlor*=*s life (inter vivos trust --revocable or irrevocable) or by
will (testamentary trust.)*
*
To create trust, property owner transfers asserts to trustee, with trust
instrument or will setting forth terms of the trust. Properly drafted
trust sets forth both:
- dispositive provisions fixing Bs interests
- administrative provisions specifying powers & duties of trustee in
managing the trust estate.

Inter vivos trust may be created either by


- declaration of trust
- settlor declares that he holds certain property in trust.

- settlor is trustee.
- requires neither delivery nor a deed of gift--all that is necessary is
that donor manifest intention to hold property in trust.
- If trust property is real property, Statue of Frauds requires a
written instrument for a declaration of trust.

- deed of trust - in which settlor transfers property to another person


as trustee

Settlor of trust may be both trustee & B.


If settlor is NOT trustee of inter vivos trust, deed of trust is
necessary. In order to bring trust into being, deed of trust or trust
property must be delivered to trustee.
Trustee
May be one or more trustees; may be individual or corp. Trustee may be
settlor or 3rd party, or trustee may be a B.
*
*If settlor intends to create a trust but fails to name a trustee, court
will appoint a trustee to carry out the trust. This rule is sometimes
stated: *A*A trust will not fail for want of a trustee.*@
**
*If T*=*s will names someone as trustee but named person refuses
appointment or dies while serving as trustee, & will does NOT make
provision for successor trustee, court will appoint successor trustee.
Does not apply if court finds (or trust instrument specifies) that trust
powers were personal to named trustee.*
*
Trustee holds legal title to trust property. In managing trust property,
trustee is held to a very high standard of conduct. Trustee is under
duty to administer trust solely in interest of Bs; self-dealing (wherein
trustee acts in same transaction both in its fiduciary capacity & in
individual capacity) is sharply limited & for some transactions is
prohibited altogether.
Trust must preserve the property, make it productive, & where required
by trust instrument, pay income to B.
In investment decisions, trustee owes duty of fairness to both classes
of Bs: income Bs (interested in income & high yields) & remaindermen
(concerned about preservation of principal & appreciation in values.
Other important duties include:
*
**

**
**
**
*- keeping trust property separate from trustee*=*s own property*
*
- keeping accurate records
- investing prudently
- not to delegate trust powers.

*
**
**
**
*
If trustee improperly manages trust estate, trustee may be denied
compensation, subjected to personal liability, & removed as trustee by a
court.
In order to have a trust, it is necessary for trustee to have some
duties to perform. If trustee has NO duties at all, there is no reason
to have, or to recognize a trustee. When a trust fails because trustee
has no active duties, Bs acquire legal title to trust property.
Law does not impose upon a person the office of trustee unless the
person accepts. Once a person accepts the office of trustee; can be
released from liability only with consent of Bs or by court order.

Beneficiaries
Bs hold equitable interests & have a personal claim against trustee for
breach of trust. This personal claim has no higher priority than claim
of other creditors of trustee & thus might not protect Bs if breach of
trust were only remedy.
Equity gives Bs additional remedies relating to trust property itself.
Personal creditors of trustee, other than trust Bs, can NOT reach trust
property.
If trustee wrongfully disposes of trust property, Bs can recover trust
property unless it has come into hands of bona fide purchaser for value.
If trustee disposes of trust property & acquires other property with
proceeds of sale, Bs can enforce trust on newly acquired property.
Private trusts almost always create successive beneficial interests.
Typically, trust income is payable to B (or class of Bs) for life,

perhaps to be followed by life interests in another class of Bs, with


trustee to distribute the trust corpus to yet another class of Bs upon
termination of the trust.
Trust compared to a legal life estate
*
*Trust in most cases preferable to legal life estate. If independent
trustee is NOT selected, life tenant should be made a trustee rather
than being given a life estate. Most problems are administrative
problems, & law of trust administration is well established & extensive.
If trustee*=*s powers are not spelled out in trust instrument, law will
supply a charter of administration.*
*

Creation of a Trust
Intent to Create a Trust
No particular form of words necessary to create a trust. Sole question
is whether grantor manifested intention to create trust relationship.
*
*Where grantor conveys property to grantee to hold *A*for use &
benefit*@*of another, this is sufficient manifestation of an intention
to create a trust.*
*
Duty of showing that the account which trustee renders & expenditures he
claims to have been made were correct, just & necessary--must be made
for trust purposes. If he does not keep clear & accurate account,
presumptions are against him, with all obscurities & doubts being
resolved adversely to him.
Where parent is trustee of educational trust & he makes expenditures out
of his own funds, his intent may be to discharge his moral & legal
obligation to educate his child or to follow the directions of the
trust. Question of fact as to which of the 2 purposes parent-trustee had
in mind at the time of making the expenditures.

*
*Custodial powers--custodian has power under the Uniform Gift to Minors
Act to use the property *A*as he may deem advisable for the support,
maintenance, education & general use & benefit of the minor, in such
manner, at such time & to such extent as custodian in his absolute
discretion may deem advisable & proper, without court order or without
regard to the duty of any person to support the minor, & without regard
to any other funds which may be applicable or available for the purpose.*
*

Trustee powers---as trustee for educational trust, trustee has power to


use trust funds for educational purposes only & has duty to render clear
& accurate accounts showing funds have been used for trust purposes.

Precatory language:
*
*Where T expresses wish that property devised should be disposed of by
devisee in some particular manner, but language does NOT clearly
indicate whether T intends to create trust or merely a moral obligation,
trust is unenforceable at law. Typical language raising this issue is a
bequest *A*to A with the hope that A will care for B.*@
**
*To fathom T*=*s intent, each will must be construed in accordance with
language used in each particular case in light of all the circumstances.
Problem can be avoided by clear drafting: i.e., if only a moral
obligation is desired, *A*I wish, but do not legally require, that C
permit D to live on the land.*@
*

Equitable charge--where T devises property to a person, subject to


payment of a certain sum of money to another person, T creates an
equitable charge.

Enforcing imperfect gift as a trust:


Gift requires delivery of subject matter. If gift fails for want of
delivery, transaction can be enforced as an oral declaration of trust by
donor. Majority of courts require clear & convincing evidence that a
trust was intended.
Necessity of Trust Property
Since trust is method of disposing of, or managing, property, it is said
that a trust cannot exist without trust property.
Trust property may be /any/ interest in property that can be transferred:
- contingent remainders
- leasehold interests
- chooses in action
- royalties
- life insurance policies
- anything that is called property

Critical question is whether particular claim will be called property by


a court.
*
*Requirement of identifiable trust res distinguishes a trust from a
debt. Trust involves a duty to deal with some specific property, kept
separate from trustee*=*s own funds. Debt involves obligation to pay a
sum of money to another. Crucial factor in distinguishing between trust
relationship & ordinary debt is whether recipient of funds is entitled
to use them as his own & commingle them with his own monies.*
*
Resulting trust: trust that arise by operation of law in one of 2
situations:
*
**
*
- where express trust fails or makes an incomplete disposition
- purchase money resulting trust-- where one person pays purchase price
for property & causes title to property to be taken in name of another
person who is NOT a natural object of the bounty of purchaser.
*
*
example: A pays O $10K for Blackacre: the deed conveying Blackacre names
B as grantee. Presumption arises that A did NOT intend to make a gift of
the property to B but has some other reason for causing B to be named as
grantee. Unless presumption is rebutted, B hold title on resulting trust
for A. Can be rebutted by evidence showing that A did intend to make
gift to B, or that A made a loan to B of the purchase price.
*
*Where B is A*=*s child, B is likely object of gift from A, presumption
arises that A intended to make gift to B. Can be rebutted by evidence
showing that A intended to retain beneficial enjoyment and had a reason
for placing title in B*=*s name.*
**
**
**
*
Statutes of fraud does not apply, even though subject matter is real
property, where resulting trust arises by operation of law.
Resulting trust does NOT contemplate ongoing fiduciary relationship
wherein trustee holds & manages property for B. Once resulting trust is
found, trustee must reconvey property to beneficial owner upon demand.

Prevailing view is that a person can assign future earnings from an


existing K. Theory is that a person who has present ownership of the
means of producing a thing has a present interest in the thing to be
produced.
Future profits are not identifiable as trust res. Did not declare trust
but make a gift of the profits.

Taxation of Grantor Trusts pg. 597


Necessity of Trust Beneficiaries
Trust must have one or more Bs. Must be someone to whom trustee owes
fiduciary duties, someone who can call trustee to account.
Exception: Bs may be unborn or unascertained when trust is created. If
at time trust becomes effective Bs are too indefinite to be ascertained,
attempted trust may fail for want of ascertainable Bs.

//
/Clark v. Campbell /(1926)
*
*T put personal property in trust & instructed trustees to distribute
items *A*to such of my friends as my trustees, shall select.*@
*
By common law, cannot be a valid bequest to an indefinite person. Must
be a B or a class of Bs indicated in will capable of coming into court &
claiming benefit of bequest. Class must be capable of delimitation.
*
*Where T bequests *A*to relatives*@*can refer to statute of distribution
to identify class. Word *A*friends*@*unlike *A*relations*@*has no
accepted statutory or other controlling limitations.*
*
________
*
*In trusts today, B*=*s are often given powers of appointment... pg. 602*
*

//*////

/*In re Searight*=*s Estate*/*(1950)*


*
T gave dog to Florence (trustee) & directed executor to deposit $1K to
be used by him to pay Florence so much each month for car of dog.
Honorary trust --bequest for care of a specific animal. Called honorary
because B (the animal) cannot enforce the purpose of the testator.
*
*Modern authorities uphold validity of gift for purpose designated in
honorary trust where person to whom power is given is willing to carry
out T*=*s wishes. Instrument creating such trust must limit duration of
trust to human lives so as not to violate Rule against Perpetuities.*
*
T left a specific amount of money to be used that could be determined to
last only a certain period of time--limits duration to that within rule
against perpetuities.
If trustee refuses or when trust ends, remaining trust goes into a
resulting trust.
______
Honorary trust usually seen in care of animals, or bequests for erection
or maintenance of tombstones or monuments. If trustee refuses or quits,
court will probably NOT appoint a new trustee.

Necessity of a Written Instrument


Inter vivos oral trust of personal property is enforceable. Statute of
Frauds requires any inter vivos of land to be in writing. Statute of
Wills requires that testamentary trust be created by will.
Under certain circumstances, court will enforce inter vivos oral trust
of land or an oral trust arising at death.
Oral Inter Vivos Trusts of Land
*
*Where O conveys land to X upon an oral trust to pay the income to A for
life & upon A*=*s death to convey the land to B, S of F prevents
enforcement of express trust. Trend in cases is to prevent unjust
enrichment of X by finding that X holds on a constructive trust for Bs.*
**
*Constructive trust for Bs imposed where transfer wrongfully obtained by
fraud or duress, where transferee, X, in confidential relationship with
transferor, or where transfer made in anticipation of transferor*=*s
death. Most cases involve one of these situations.*

*
More common than oral trust for 3rd party is oral trust for benefit of
transferor. Some of transferors are attempting to avoid their creditors
or spouses or to achieve some tax benefit.

//
/Hieble v. Hiebel/ (1972)
Court generally finds constructive trust where fraud or abuse of
confidential relationship. Where there is a confidential relationship,
burden of proof rests on party denying existence of trust by clear &
convincing evidence to negate such trust.

Oral Trusts for Disposition at Death


//
/Olliffe v. Wells /(1881)
*
P*= heirs*
**
D*= trustee *
**
*T devised her residuary estate to Rev. Wells *A*to distribute the same
in such manner as in his discretion shall appear best calculated to
carry out wishes which I have expressed to him or may express to him.*@
*
Court: Trust too indefinite.
Residuary bequest to Wells gives him no beneficial interest but
expressly requires him to distribute all property bequeathed to him. He
is a trustee.
Semi-secret trust--does not reveal disposition of trust. Cannot be
enforced without knowing who Bs are.
If a person procures an absolute devise or bequest to
promising T he will convey property to or hold it for
persons, & afterwards refuses to perform his promise,
of confidence reposed in him by T & of his own fraud,
equity, upon clear & satisfactory proof, will enforce
suit of such 3rd persons.

Revocable Trusts

himself by orally
benefit of 3rd
trust arises out
which a court of
against him at

*
*Under typical revocable inter vivos trust involving a /deed of trust/,
trust settlor transfers legal title to property as trustee pursuant to a
writing in which settlor retains power to revoke, alter, or amend the
trust & the right to trust income during lifetime. On settlor*=*s death
trust assets distributed to or held in further trust for other Bs. All
property in trust passes outside probate.*
*
All jurisdictions recognize validity of trust where property is
transferred to another person as trustee & settlor reserves power to
revoke trust during life. Settlor may also reserve income interest &
testamentary power of appointment.
Majority jurisdictions require settlor to retain revocable power.
*
*Testamentary trust, created in will, is irrevocable--can*=*t change it
once you are dead.*
*
Revocable declaration of trust--settlor declares himself trustee for
benefit of himself during lifetime, with remainder to pass to others at
his death.
//
/In re Estate & Trust of Pilafas/ (1992)
Revocable inter vivos trust with assets created by T, who is settlor,
trustee & B (with other Bs as well.) T executed will that poured over
residue into trust.
*
*Both documents are missing upon T*=*s death.*
*
Presumption as to will is that is was revoked/destroyed.
When settlor reserves power to revoke his trust in particular manner or
under particular circumstances, he can revoke it only in that manner or
under those circumstances. (here, revocation required writing from
settlor to trustee--no such writing found--trust is good.)
Probated property passes by intestacy, so there is no residue to pour
over into trust--trust remains funded by property created in trust
instrument.
Where settlor has NOT specified a mode of revocation, settlor could
exercise his power to revoke in any manner that sufficiently manifested
his intention to revoke.

//
/State Street Bank & Trust Co v. Reiser/ (1979)
Creditor seeks to reach assets of inter vivos trust to pay debt owed to
it by estate of settlor of trust.
*
*Revocable inter vivos trust was executed, with power to amend & revoke,
& right during settlor*=*s lifetime to direct disposition of principal &
income. Funded by capital stock of 5 closely held corps.*
*
T applied to bank for loan indicating he had controlling interests in
corps which owned most significant assets appearing on the financial
statement. Bank made unsecured loan & T signed demand note to order of
bank. T dies 4 months later.
*
*Under trust, trustees *A*may in their sole discretion pay from
principal & income of this Trust Estate any & all debts & expenses of
the administration of the Settlor*=*s estate.*@
*
During lifetime of settlor, bank would have had access to assets of
trust. When person creates for his own benefit a trust for support or a
discretionary trust, his creditors CAN reach maximum amount which the
trust, under terms of the trust, could pay to him or apply for his
benefit--even if trust contains a spendthrift clause.
Assets which pour over into such a trust, over which settlor did not
have control during his life, are NOT subject to the reach of creditors.
Nonprobate assets are NOT all treated alike.
*
**
**
*- Life insurance proceeds or retirement benefits usually exempt from
insured*=*s creditors if payable to spouse or child.*
*
- US savings bonds with a payable-on-death B may be exempt.
*
*- Creditors of joint tenancy in land cannot reach land AFTER joint
tenant*=*s death for deceased joint tenant*=*s interest has vanished.*
**
**

*
Pour-Over Wills
Pour-over will is where O sets up revocable inter vivos trust naming X
as trustee. O transfers to X, as trustee, his stocks & bonds. O then
executes will devising residue of his estate to X, as trustee, to hold
under the terms of the inter vivos trust.
*
*Incorporation by reference & independent significance theories were
used by courts to validate pour-overs. However, because of limitations &
uncertainties of these doctrines, statutory provisions validating have
been enacted in all jurisdictions. See UPC--Testamentary Additions to
Trusts which states that property devised to a trust is NOT held under a
testamentary trust but becomes part of the trust to which it is devised.
Note: revocation or termination of the trust before T*=*s death causes
the devise to lapse. *
*//
/Clymer v. Mayo/ (1985)
T executed will with H to receive her personal property. Residue to pour
over into 2 inter vivos trusts created same day.
*
**
*Trust A: marital deduction trust with H as income B entitled to reach
principal at discretion of trustee. Funded by 50% of value of Donor*=*s
adjusted gross estate.*
*
Trust B: contained balance of estate or entire estate if H did not
survive her. Provided for 5 initial specific bequests with remaining
held for benefit of H for life.
Remainder for nephews & neices of T living at time of her death. Trust
given discretion to spend so much of income & principal for their
comfort, support & education. Trust terminates when all nephews & neices
reach 30 & remaining assets divided between 2 universities.
*
*
T also changed B to life insurance & retirement annuity K to trustees.
1978, T & H divorce. Property settlement contained waiver of rights by H.
*
*Issue: effect of divorce upon dispositions provided in T*=*s will & trust.*
**
*1) Validity of pour-over trust challenged by T*=*s parents arguing

trust never came into existence; claim they are entitled to T*=*s entire
estate as her sole heirs at law. *
*
Pour-over Statute: bequest or devise may be made to trustee(s) of a
trust established or to be established if 1) trust identified,
2) terms of trust set forth in written instrument/regardless of
existence, size of character of corpus of trust./
//
Court: pour-over devise meets statutory conditions--act does not require
that trust res be more than nominal or even existent
POUR-OVER DEVISE VALID

2) Trust A terminated upon finding its purpose--estate tax marital


deduction--became impossible after divorce.
3) H interest in Trust B terminated though T failed to revoke or amend
trust after divorce.
Effect of Divorce on Wills statute: If, after executing will, T shall be
divorced, which revokes any disposition or appointment of property made
by the will to the former spouse. Devise pass as if former spouse had
failed to survive T.
*
*Evident from time & manner in which trust was created & funded that
T*=*s will & trust were integrally related components of a single
testamentary scheme. For all practical purposes, the trust, like the
will, spoke only at T*=*s death. For this reason, H*=*s interest in
trust revoked by operation of divorce/will statute.*
**
*4) Colleges challenge remainder to neices & nephews as they are thru
marriage & none exist by blood--this class gift to *A*nephews &
neices*@*therefore lapses for lack of identifiable Bs.*
*
Extrinsic evidence admitted due to ambiguity regarding nephews & neices
& found intent of T was neices & nephews by marriage.
*
*Colleges argue divorce left T without neices & nephews. Court:
divorce/will statute applies only to spouse & not spouse*=*s relative.*
*
Unfunded life insurance trust --settlor names trustee of her inter vivos
trust B of her life insurance policy but does not add any other funds or
assets to trust.

Funded inter vivos trust--settlor adds other assets to inter vivos


trust. Funded revocable inter vivos trust has independent significance
because trust instrument disposes of assets transferred to trust during
life.
Unfunded revocable life insurance trust coupled with will pouring over
probate assets into trust creates a unified trust of both life insurance
proceeds & probate assets & is an inter vivos trust.
*
*Testamentary trust created where trust created in will which designates
B of insurance proceeds *A*trustee named in my will.*@
*

Revocation by divorce:
Recent statutes in some states provide that divorce revokes any
provision in a revocable trust for the spouse, who is deemed to have
predeceased the settlor.
UPC revokes not only all provisions for divorced spouse but also any
provisions for relative of divorced spouse. Revocation by divorce under
UPC can be overcome only by express terms of governing instrument--not
by extrinsic evidence.

Misc. Consequences of Inter Vivos Trust


*
*
- Inter vivos trust is NOT recorded in public place.
- Inter vivos trust comes into being without any court order & is not
subject to court supervision whereas a testamentary trust is created by
court order & trustee MAY have duty to account to court.
- General rule--settlor of inter vivos trust of personal property may
choose state law that is to govern trust. T may NOT have this freedom of
choice.
- Revocable trust, like will, can be contested for lack of mental
capacity & undue influence; however, in practice, it is more difficult
to set aside a funded revocable trust than a will on these grounds.
i.e., heirs are not entitled to see trust instrument & if they bring
suit they will be able to learn trust terms, but they are therefore
forced to commit themselves to legal fees in a lawsuit wihout a
realistic appraisal of their chances of winning.
- NO federal tax advantages to a revocable trust. Assets of revocable
trust included in gross estate of settlor.
*

*- When one spouse wants some assurance that surviving spouse*=*s


property will be disposed of in accordance with a mutual estate plan,
both spouses can create a revocable trust of their property--to become
irrevocable upon death of one spouse. This use of a revocable trust may
be especially attractive in second marriages & is much preferable to
trying to control surviving spouse*=*s disposition by K.*
*

*
*
Discretionary Trusts
Mandatory trust- trust MUST distribute all income.
Discretionary trust- trustee has discretion over payment of either
income or principal or both. Discretionary powers of trustee may be
drafted in limitless variety.
Spray trust - trustee distributes income to one or more members of a group.

//
/Marsman v. Nasca/ (1991)
*
*Where trustee holds discretionary power to pay principal for
*A*comfortable support & maintenance*@*of B, trustee has duty to inquire
into financial resources of that B so as to recognize those needs.*
**
*Discretion to trustees to pay B such amount *A*as they shall deem
advisable for his comfortable support & maintenance*@*is NOT absolute.
Prudence & reasonableness furnish standard of conduct, NOT caprice &
careless good nature, much less a desire on part of trustee to be
relieved from trouble.*
**
*There is duty of inquiry into needs of B that follows from
discretionary requirement of *A*prudence & reasonableness*@*.*
*
B is now deceased. Trustee failed to inquire & pay funds to B under
conditions of trust. Constructive trust in favor of Bs estate is imposed
on amounts wrongfully withheld.
*
*Secondary issue: trust instrument contained exculpatory clause as to
trustee*=*s liability. Trustee drafted instrument & lower court

therefore held trustee liable for damages. Reversed even though


exclupatory clauses looked on with disfavor.*
**
**
*Court: *A*Provisions inserted in trust instrument without any
overreaching or abuse by trustee of any fiduciary or confidential
relationship to settlor are generally held effective except as to
breaches of trust committed in bad faith or intentionally or with
reckless indifference to interest of B.*@
*

*
*
Courts will not uphold exculpatory clause in testamentary trust.
*
*If trustee has simple discretion unqualified by *A*sole*@*or the like,
courts will NOT substitute their judgement for trustee*=*s as long as
trustee *A*acts not only in good faith & from proper motives, but also
within bounds of reasonable judgment.*@
*
When instrument purports to free trustee from some or all of these
limitations, problems in construction arise.
*
*At one extreme are instruments that give unlimited discretionary power
to trustee. But discretionary power *A*in trustee*=*s absolute &
uncontrolled discretion*@*is NOT in fact absolute--*@*if it appears that
trustee has utterly disregarded interests of B, the Court will intervene.*@
**
**
*
- Courts relying on Restatement good faith standard, declare that
trustee must NOT act capriciously or arbitrarily.
*
*- Other courts apply reasonableness test even when discretion is
*A*absolute*@*.*
**
**
*
Appears that simple discretion & absolute discretion is one of degree

with more elasticity in concept of reasonableness the greater the


discretion given.
_____
*
*Another source of litigation is whether trustee, in exercising
discretionary power to spend income or principal for B*=*s support, may
consider other resources of B. Where not dealt with in instrument, issue
may end up in court. Majority--presumption that settlor intended B to
receive his support from trust estate regardless of B*=*s other
financial resources where trust silent as to other assets. *
**
*Duty of trustee inquiry & then decision to distribute based on
providing funds to enable B to maintain *A*manner in which B accustomed
to.*@
**
*Trustees have fiduciary duty to income B*=*s & principal B*=*s
(remainderman). Trustees tend to favor principal B--paid out of principal.*
*
Where trust for life support & principal not enough to last life, OK for
trustee to try to spread out & make it last.

Spendthrift Trusts: Creditors Rights


Spendthrift trust - Bs can NOT voluntarily alienate their interests nor
can their creditors reach their interests. Created by imposing disabling
restraint upon Bs & their creditors.
Spendthrift trust recognized in almost all jurisdictions.
*
*In NY, all trusts spendthrift unless settlor expressly makes B*=*s
interest transferable. In other jurisdictions trusts are NOT spendthrift
unless settlor inserts spendthrift clause.*
*//
/Shelley v. Shelley/ (1960)
Trust provides:
*
**
*
- income to wife, remainder of income to son.
*

*- disbursement from principal after son 30 & upon approval of either


one of son*=*s uncles.*
**
*- trustee may *A*make disbursements for use & benefit of my son, Grant,
or his children, in case of any emergency arising whereby unusual &
extraordinary expenses are necessary for proper support & care of my
said son, or said children...*@**
*
- contains spendthrift clause.

*
**
*
Son marries twice & has 2 children by each wife. Divorces both. First
divorce--court orders child support. Second marriage--court orders child
support & alimony. Son disappears & ex-wives want to subject trust to
their support awards.
R1-although trust is spendthrift trust or trust for support, interest of
B can be reached in satisfaction of enforceable claim against B by wife
or child of B for support, or by wife for alimony.
1) availability of income of trust to claims
Trust places no conditions on upon right of son to receive trust income
during his lifetime. Can reach income UNLESS spendthrift provision
precludes them from doing so.
Public policy requires that interest of B in trust should be subject to
claims of his children. Though justification for permitting claim for
alimony is not as clear, majority of cases hold that spendthrift
provisions do NOT bar claim for alimony.
*
*Holding: B*=*s interest in INCOME of trust subject to claims for
alimony & support for children as provided under both decrees for
divorce. Claims limited--claimants may reach only that much of income
which trial court deems reasonable under circumstances. Reasonableness
factors:*
*
- respective needs of H & W
- needs of children
- amount of trust income
- availability of corpus for various needs

- any other factors which are relevant in adjusting equitably the


interests of claimants & B

*
*
2) availability of corpus to claims
Son has no interest in corpus until trustee gives it, & until then
claimants can NOT reach it.
*
*Trust directed & authorized trustee, in exercise of sole discretion
upon death of settlor*=*s wife, to make disbursements to son & son*=*s
kids. Disbursements to be made *A*in case of any emergency arising
wherby unusual & extraordinary expenses are necessary for proper support
& care of my said son, or said children...*@*Emergency includes
circumstances here where children are deserted by their father & are in
need of support.*
*
Invasion of corpus only if necessary to first reach income in
circumstances above & then income is insufficient.
Protection of spendthrift trusts from creditors have several exceptions:
*
**
**
*- spendthrift trust can NOT be set up by settlor for settlor*=*s own
benefit. Creditors of settlor can reach settlor*=*s interest in income
or principal in mandatory trust. In discretionary trust, creditors can
reach max amount trustee could, in trustee*=*s discretion, pay settlor
or apply for settlor*=*s benefit.*
**
*- judgments for child or spousal support can be enforced against
debtor*=*s interest in spendthrift trusts in majority of states. In
substantial minority, spouse or child cannot reach spendthrift trust to
satisfy judgments for support.*
**
*- person who has furnished NECESSARY services or support can reach
B*=*s interest in spendthrift trust.*
**
*- US or a state can reach B*=*s interest to satisfy a tax claim against B.*
**
*- In several states, B*=*s creditors can reach that part of spendthrift

income in excess of amount needed for support & education of B. i.e., in


NY, in determining what is necessary for support of B & what is excess,
courts developed station-in-life rule--which rendered excess-income
statutes relatively useless to creditors--accustomed manner of living of
child--B is likely to require full income from trust.*
*
- In a few states, creditor is permitted to reach certain percentage
(usually 10-30%) of income of spendthrift trust B in a garnishment
proceeding ordinarily applicable to wage earners.
- In several states, $ limits placed on amount that can be shielded in
spendthrift trust.
*
*- In majority of states, spendthrift restraint may be imposed upon
remainder interest as well as upon income interest in trust. If
restraint imposed on remainder interest, remainderman*=*s creditors
cannot reach principal of trust until remainderman is entitled to
receive principal.*
*
- beneficial interest in spendthrift trust cannot be reached by
creditors on bankruptcy--does not pass to trustee in bankruptcy.

*
**
*
Support Trusts
Support trust requires trustee to make payments of income (or, if
specified, of principal too) to B in amount necessary for education or
support of B in accordance with ascertainable standard.
*
*Creditors of B of support trust can NOT reach B*=*s interest, except
suppliers of necessaries may recover thru B*=*s right to support.*
**
*Discretionary trust gives trustee discretion to pay over income or
principal or to withhold it completely. Courts can NOT compel trustee to
exercise discretion (absent improper motive or, perhaps unreasonable
judgment.) Since B can NOT compel trustee to make payment, neither can
B*=*s creditor.*
**
*Creditor may, in some states, be entitled to order directing
discretionary trustee to pay creditor before paying B. Trustee need NOT
pay any part of trust fund to B, but if trustee determines to do so,

trustee must pay creditors who now stand in B*=*s shoes.*


*
Modification & Termination of Trusts
If settlor & all Bs consent, trust may be modified or terminated. No one
else has any beneficial interest in trust. Trustee has no beneficial
interest & can NOT object. Such a right exists even if trust contains a
spendthrift clause.
If settlor is dead or does NOT consent to modification or termination of
trust, question arises whether Bs can modify or terminate trust if they
all agree.
//
/In re Trust of Stuchell /(1990)
*
P*, trust income B, petitioned court to approve, on behalf of her
retarded son--a remainderman of trust, an agreement which had been
approved by other income Bs & remaindermen, to modify trust. If trust
not modified, son*=*s remainder will be distributed directly to him if
he survives 2 life-income Bs which will severally limit his ability to
qualify for public assistance.*
**
*Stated purpose of elaborate modification is to ensure that trust funds
be used only as a secondary source of funds to supplement, rather than
replace, son*=*s current income & benefits from pubic assistance.*
*
R2: Court will direct or permit trustee to deviate from term of trust if
owing to circumstances not known to settlor, & not anticipated by him,
compliance would defeat or substantially impair accomplishment of
purposes of trust; & in such case, if necessary to carry out purposes of
trust, court may direct or permit trustee to do acts which are NOT
authorized or are forbidden by terms of trust.
Court will NOT permit or direct trustee to deviate from terms of trust
merely because such deviation would be more advantageous to Bs than
compliance with such direction.

//
/Hamerstrom v. Commerce Bank of Kansas City/ (1991)
*
P*is B of trust which currently provides $150 per month for her life to
be distributed to her husband upon her death, or if he does NOT survive
her, to their 2 sons. *P*/B requests deviation by which court would
order trustee to increase monthly payments to $2K. *P*cites changes in
economic condition as necessitating increase--inflation, husband*=*s

retirement & increased health care costs.*


**
*Husband & sons agreed to deviation, but GAL for *A*unknown &
unascertainable*@*Bs of the remainder in the trust opposed the action
based on statute:*
*
When all adult Bs who are NOT disabled consent, court may, upon finding
that such variation will benefit disabled, minor, unborn & unascertained
Bs, vary the terms of a private trust so as to eliminate the interests
of some Bs & increase those of others, to change the time or amounts of
payments & distributions to Bs, or to provide for termination of the
trust at a time earlier or later than that specified by the terms.
*
*
Statute modified /Claflin/ rule:
Trust cannot be terminated prior to date specified by terms of trust
where material purpose of settlor has not been attained, even if all Bs
consent to its termination.
*
*Court found that T*=*s intent was to limit distribution of his estate
to those persons he specifically identified within the will.--especially
compelling is lack of reference to heirs of sons--who therefore are NOT
B*=*s.*
**
*Unknown B*=*s does NOT include potential interest of T*=*s heir as the
corpus may revert back to them if all remainderman predecease the life B
without issue.*
*
Bs refers to those persons, including unborn & unascertained issue,
individually named or who are intended in a named class, identified by T
in the testamentary trust & for whom T expressed intent to make provision.
Attorney fees:
*
**
*Trust B may recover atty fees from trust estate where efforts of B
result in real benefit to the estate. i.e., trust instrument which is so
ambiguous that 2 or more persons may fairly make adverse claims to the
fund is an example of a situation justifying awarding costs & atty fees.
Also been allowed when trustee*=*s duties are so ambiguous & he sues for
judicial construction of the testamentary trust.*
*

Where a challenge is made by a party solely for his own benefit & no
benefit to the trust estate is demonstrated, an award for atty fees
payable from the trust estate cannot normally be made.
*
**
P*argues traditional requirement that party demonstrate benefit to
estate before atty fees can be awarded inapplicable here. Court: While
statute does NOT expressly vest Bs with authority to pay atty fees from
trust*=*s assets, Bs are granted extensive powers including ability to
terminate the trust. Authority to pay atty fees from trust*=*s assets
must also be implicitly encompassed within these extensive powers. All
party*=*s also agreed to modify trust to pay atty fee*=*s--allowed.*
*
____
In determining class of Bs whose consent is necessary to modify or
terminate a trust the presumption of fertility is rebuttable.
*
*Virtual representation--under virtual representation, an owner of a
future interest is bound by a judgement in a lawsuit, although not made
a party thereto, when a party to the lawsuit has an interest in the
property that will be affected by the judgement in the same way as the
party represented (an *A*identity of interest*@*). Relationship between
representative & person represented must be such *A*that an adequate
presentation of the legal position of the representative would be
adequate presentation of the legal position of the unborn person.*@
*
Doctrine of virtual representation only applies to class gift. One
living member of class may represent unborn members of the class.
____
When destitute income B petitions for power to invade principal for
support, & all Bs do NOT consent, relief is ordinarily denied unless
trust instrument is construed to contain a power to invade, express or
implied.
In/In re Tutino/ (1990), court held that an income B was required to
demand invasion of the trust corpus before qualifying for Medicaid by
statute-- however, statute does NOT apply if trust instrument prohibits
its application. If settlor wants to preclude its application, trust
should prohibit income B from applying to a court for a support allowance.
Under /Claflin/ Rule, great majority of authority holds that trust
cannot be terminated prior to time fixed for termination, even though
all Bs consent, if termination would be contrary to material purpose of
settlor.
Considerable disagreement as to circumstances under which termination
would be contrary to purpose of settlor. Generally, trust cannot be
terminated if

- it is a spendthrift trust,
- B is NOT to receive the principal until attaining a specified age,
- it is a discretionary trust
- it is a trust for support of B.

Such provisions are usually deemed to state a material purpose of settlor.


*
*May be possible to terminate testamentary trust by compromise agreement
between Bs & heirs entered into soon after T*=*s death. Most court will
approve compromise agreements that deliberately eliminate trusts, even
spendthrift trusts. Some courts refuse to approve a will compromise
where compromise destroys trust that is essential to material purpose of
settlor.*
*
Trust NOT void merely because it can extend beyond perpetuities period.
RAP indirectly limits duration of trust by requiring that equitable
interests in trust must be certain to vest or fail within 21 years after
death of all persons who can affect vesting of interests. Even though
settlor can create trust that may extend beyond perpetuities period,
settlor cannot prevent termination of trust by Bs when perpetuities
period has expired. This is a limitation upon /Claflin/ rule.

Changing Trustees
Unless trustee has been guilty of breach of trust or has shown
infirmness, Bs cannot have trustee removed. Standard rule--settlor
reposed special confidence in designated trustee & court will NOT change
trustees merely because Bs want to.
Inability of Bs to change trustee lessens competition among trust
companies & contributes to high fees.
Consider that in some states, entire inventories of trust accounts are
routinely bought & sold between banks. Bs may currently be served by a
bank or trust company never selected by the settlor.
*
*Ca authorizes court to remove trustee where trustee*=*s compensation is
excessive or for other good cause, upon petition of B. *
*
Charitable Trusts
Trust must have charitable purpose, at least predominantly, to be valid.
//

/Shenandoah Valley National Bank v. Trust/ (1951)


*
*Settlor instructs trustee to distribute income of trust among all
1st-3rd graders at John Kerr School at Christmas & Easter time. If
dominant intent as expressed is charitable, trust will be sustained. If
T*=*s intent is benevolent-trust invalid as violating rule against
perpetuities.*
*
Restatement: charitable purposes include-*
**
*
- relief of poverty - advancement of education
- advancement of religion - promotion of health
*
*- govt*=*al or municipal purposes, & *
*
- other purposes the accomplishment of which is beneficial to the community.

*
**
*
Charitable trusts are favored creatures of law enjoying special
solicitude of courts of equity.
Where gift results in mere financial enrichment, trust sustained only
when found & concluded from entire context of will that the ultimate
intended recipients were poor or in necessitous circumstances.
______
In general, charitable trust is exempt from Rule Against Perpetuities &
may endure forever. This exemption is NOT given to a trust for
noncharitable purposes.
At common law, noncharitable trust is void ab initio if it can last
longer than perpetuities period. Majority of jurisdictions have modified
common law rule against perpetuities by adopting wait-and-see
doctrine--where court does not determine validity of interest by what
might happen, but by what actually happens. If jurisdiction waits for
common law perpetuities period to expire before declaring trust void, a
noncharitable purpose trust can endure for 21 years.

To be classified as charitable, trust that is for benefit of class of


persons & not for benefit of community at large must be for relief of
poverty or for advancement of education, religion, health, or other
charitable purpose.
Trust may be valid charitable trust although persons who directly
benefit are limited in number. Trust awarding scholarships or prizes for
educational achievement is charitable. Trust to educate a particular
person or named persons is NOT charitable--neither is a trust to educate
descendants of settlor.
Are these charitable trusts:
- trust for benefit of students of chase law-- YES, indefinite group &
educational purpose
- trust for education of Chase College of Law students as long as school
exists, then for education at UC College of Law--one charitable trust
followed by another---OK
- establish charitable trust for benefit of education of students at
Chase, when ceases to exist, then Peirson. Private trust following
charitable trust--NOT OK, neither is reverse, private trust -->
charitable trust

Against public policy to endow perpetually a political party; hence


trust to promote success of particular party is NOT charitable. Trust
for improvement of structure & methods of govt, in manner advocated by
particular political party, is charitable.
Trust with purpose of bringing about a change in law may be charitable,
provided purpose NOT to bring about changes in law by illegal means,
such as revolution or illegal lobbying.
Common law confers power on state atty general to enforce charitable
trusts--largely formal supervision. Unless newspaper publicity is given
to some alleged irregularity, atty general rarely investigates internal
workings of charitable foundations.
Only person other that atty general who can enforce a charitable trust
is a person with a special interest as a B. Person must show that he or
she is entitled to receive a benefit.
Modification of Charitable Trusts: Cy Pres
Judicial cy pres -- property is given in trust to be applied to
particular charitable purpose, &
1) it is or becomes impossible or impracticable or illegal to carry out
particular purpose, &
2) if settlor manifested more general intention to devote property to
charitable purposes,
trust will NOT fail but court will direct application of property to
some charitable purpose which falls within general charitable intention
of settlor.

Trust document may provide what happens if purpose no longer possible.

//
/In re Nehr/ (1939)
Testamentary trust of property to build hospital for benefit of village
as memorial to husband. Village accepted & then realized could not
afford to build hospital & did not need one as nearby village hospital
sufficient for their needs.
*
*Court allows cy pres finding settlor*=*s paramount intention was to
give property for general charitable purpose & settlor grafted on
general gift specific manner in achieving. Grafted intentions may be
ignored.*
*

//
/In re Estate of Buck/ (1986)
Testamentary trust set up to benefit needy of 2nd wealthiest county in
US. Trust increased greatly in value & trustee petitioned court to
expand trust to benefit needy in surrounding counties. Court refused to
apply cy pres where variation will meet desire & suit convenience of
trustee, or where more efficient use of fund is available.
______
Most commentators favor using cy pres where changing needs.
Courts have used cy pres when money has been left to an entity that does
NOT exist. i.e., gift to Cancer Research fund, a nonexistent entity, has
been given to the American Cancer Society, which sponsors cancer research.
*
*Cy pres should be contrasted with administrative deviation. Court will
permit deviation in administrative terms of trust when compliance would
defeat or substantially impair accomplishment of purposes of trust. Not
always clear what is an administrative term & what is a central
purpose--courts have been known to interpret *A*administrative*@*broadly
on appealing facts.*
*

//
/In re Wilson/ (1983)
Equal protection challenge to trust set up to benefit male students.

Court modified administration of trust to eliminate any state


participation--here is was submission by school principal of boys
meeting trust requirements.
Powers of Appointment
Powers of appointment held by trust Bs--powers that give Bs ability to
deal flexibly with changing circumstances in future--with births, deaths
& marriages in family; with ability of children to manage property; with
change in economy & investment returns; with changes in the law.
Often used to prolong making a decision. Special testamentary power of
appointment
Donor - person who creates power of appointment
Donee - person who holds power
Objects of power- persons in whose favor power may be exercised
Appointee - when power is exercised in favor of a person

Instrument creating power may provide for takers in default of


appointment if donee fails to exercise power.
General power - exercisable in favor of donee, his estate, his
creditors, or creditors of his estate. May permit donee to do most
things an owner of fee simple could do. This is true of a general power
presently exercisable.
Special power
creditors, or
persons donee
appoint among

- power NOT exercisable in favor of donee, his estate, his


creditors of his estate. When there is a limited number of
can appoint to. Most common special power is power to
issue of donee.

*
*Inter vivos power -- exercisable by deed. Can be exercised at any time
during donee*=*s lifetime.*
*
Testamentary power-- exercisable only by will
*
*If creating instrument does NOT name a taker in default, property
passes back to donor or donor*=*s estate if power is NOT exercised.*
*
Almost all powers of appointment are created in trustees or in Bs of trusts.
Property subject to /special power/ of appointment viewed as owned by
donor. Applied thru doctrine of relation back.
Donee of general power treated as owner of appointitive property for
income, estate & gift tax purposes.

//
/Irwin Union Bank & Trust v. Long/ (1974)
Inter vivos general power of appointment donee has NO control over trust
corpus until he exercises his power of appointment--trustee has absolute
control & benefit of trust corpus within terms of trust instrument.
Majority:
Where power is special power, power to appoint only among a group of
persons, power is NOT beneficial to donee & cannot be reached by his
creditors.
Where donee of general power created by some person other than himself
fails to exercise power, his creditors cannot acquire power or compel
its exercise.

*
*If donee exercises power by appointing to another, appointitive assets
somehow pass into donee*=*s hands (or estate) for a scintilla of time
and, while in donor*=*s hands (or estate), equity seizes assets for
benefit of creditors.*
**
*In number of states, statutes enable creditors of donee of GP presently
exercisable to reach appointitive property, usually with qualification
that creditors must first exhaust donee*=*s own assets before resorting
to appointitive property. Under these statutes, creditors of general
testamentary power can also reach property but only at donor*=*s death.*
*
If donee of general power is also donor of power, creditors may reach
appointitive assets.
Spouse of donee-*
*If surviving spouse of donee seeks to reach appointitive property at
donee*=*s death under elective share statutes, donee of general power,
as well as donee of a special power, is NOT, in most states, treated as
owning the property. Since a surviving spouse has a claim against
donee*=*s probate estate & appointitive assets are NOT in donee*=*s
probate estate, spouse may NOT reach them.*
*
UPC changes this rule & includes in the augmented estate subject to
elective share any property over which decedent had a general power of
appointment.

Bankruptcy-*
*Under federal bankruptcy act, general power presently exercisable
passes to donee*=*s trustee in bankruptcy, but a special power & a
general testamentary power do NOT.*
*
Estate Tax --presently exercisable may be subject to estate & gift taxes.
SP not subject to estate tax.
Because of adverse tax consequences, general powers rarely created by
trust settlor in anyone except surviving spouse.
Has been held that a lawyer who drafts wills & trusts is liable for
malpractice if lawyer does not know tax consequences of powers of
appointment.

Creation of a Power of Appointment


Intent to Create a Power
*
*To create a power of appointment, donor must manifest an intent to do
so, either expressly or by implication. No particular form of words is
necessary--i.e., *A*power of appointment*@*or *A*appoint.*@
*
Power of appointment confers discretion on donee, who may choose to
exercise the power or not, & is to be distinguished from a direct
non-discretionary disposition by donor.
Words that merely express a wish or desire (precatory words) do NOT
create a power of appointment in absence of other circumstances
indicating a contrary intent.

Powers to Consume
One of the most frequently litigated problems in regard to creation of
powers is whether a power to consume principal has been created, & if
so, what standard governs the exercise of the power.
*
*Rule of repugnancy--where there is a grant, devise, or bequest to one
in general terms only, expressing neither a fee nor life estate, & there
is a specific limitation over what remains at first taker*=*s death, if
there is also given to first taker an unlimited & unrestricted power of
absolute disposal, express or implied, first taker has a fee.*
*

Good atty will NEVER create a legal fee simple with power to consume--or
create a legal life estate at all. Trust with life B is preferable in
almost all situations.
If life B of trust is to have rights to consume principal, atty drafting
will or trust should make it as clear as possible under exactly what
circumstances the life tenant can reach the principal.
Release of a Power of Appointment
Donor of a life estate coupled with a testamentary power usually intends
to protect the donee from an indiscreet or unwise exercise of the power
during life. A testamentary power has as one of its purposes keeping the
donee free to exercise discretion up until the moment of death. Hence,
the donee of a testamentary power of appointment can NOT legally K to
make an appointment in the future.
*
*Restitution available as measured by what contracting party lost
against donee*=*s estate not from the trust assets.*
*
Donee can release so property go to taker by default or back to donor.
Release of a power prevents the donee from exercising the power thereafter.
If presently exercisable special power can K to appoint as long as to
proper object.

Exercise of a Power of Appointment


*
*Exercise by Residuary Clause in Donee*=*s Will*
*
Large majority of jurisdictions take position that residuary clause does
NOT exercise a power of appointment held by T. States adhering to
majority rule differ on whether

//
/Beals v. State Street Bank & Trust Co./ (1975)
*
*T has life estate with testamentary general power of appointment. Will
directed that upon default of appointment, daughter*=*s share
distributed by laws of intestacy.*
**
*Partial release of general power to limit her exercise thereof to

dad*=*s descendants--creating a special power.*


*
T did NOT expressly exercise power of appointment--but her residuary
left to her nieces & nephews, including any power of appointment she had
from H.
*
*Most court*=*s interpret donee*=*s will under law governing
administration of trust--usually law of donor*=*s domicil.*
**
*Under law of state where trust administered, a general residuary clause
did NOT exercise a special testamentary power of appointment. While
under state of donee*=*s domicile, residuary clause in will exercises
not only a general power of appointment but also a special power of
appointment.*
*
_____
Most courts would find a general residuary clause without more would not
exercise a power of appointment, general or special. Minority find that
a residuary clause exercises a general power unless a contrary intent
affirmatively appears.
If appointitive asset is land, law of jurisdiction where land is located
governs. If appointitive assets are personal property, donor of power
may be able to select the law to govern the trust.
*
**
*
- If power created by inter vivos trust, donor may select law of
domicile of donor, or donee, or of state where trust is administered.
*
*- courts split where power created by testamentary trust. Some states
permit donor*=*s intent to control while others apply law of donor*=*s
domicile to a testamentary trust & do NOT permit donor*=*s intention to
control.*
*

*
**
**
*To prevent an unintentional exercise of power of appointment, donor may
provide that the power can be exercised only by an instrument, executed

after date of creating instrument, that refers specifically to power.


However, different courts may have different ideas about whether general
language in donee*=*s will *A*blending*@*appointitive property with
donee*=*s own property is a specific reference to power.*
*
Limitations on Exercise of a Special Power
In almost all jurisdictions, donee of general power of appointment can
appoint outright or in further trust & can create new powers of appointment.
*
*With respect to a special power of appointment, donee*=*s authority is
more limited. *
*
Under R2, donee of a special power can
- create a general power in an object of special power
- create a special power in any person to appoint to an object of
original special power--this includes an appointment in further trust,
giving trustee discretionary power to appoint to the objects.

Exclusive power of appointment--allows donee to select who among class


can take & what
Nonexclusive special power of appointment--must give to all among
class--each permissible object
Can specify in instrument whether exclusive or nonexclusive, with
default being exclusive under the R2 & majority. In addition, under R2,
special power is exclusive unless the donor specifies the minimum share.
*
*Whether a power is exclusive or nonexclusive depends upon the intention
of the donor as revealed by the creating instrument. i.e., a power to
appoint to *A*any one or more of A*=*s issue*@*creates an exclusive power.*
**
*If creating instrument does not reveal donor*=*s intent, classification
will turn upon presumption adhered to in jurisdiction.*
*

Fraud on a Special Power


Appointment in favor of person who is NOT an object of power is invalid.
Appointment to an object for purpose of circumventing the limitation on
a power is a fraud on the power & is void to the extent it is motivated
by such purpose.

Ineffective Exercise of Power


Capture:
*
**
*If donee of power makes ineffective appointment, & donee*=*s intent
cannot be given effect through allocation of assets, general rule is
that property passes in default of appointment or, if there is no
default, to donor*=*s estate. EXCEPTION--doctrine of capture which
captures property for donee*=*s estate.*
*
Capture occurs when donee of general power manifests an intent to assume
control of the appointitive property for all purposes & not merely for
limited purpose of giving effect to expressed appointment. Rest upon
conception that inasmuch as donee of a general power could appoint to
her estate, appointitive property will pass to her estate if she would
prefer that in case of an ineffective appointment.
Ineffective appointments raise issue of whether capture applies usually
involve lapse of an appointment to a dead appointee, or violation of
RAP, or failure of donee to comply with some prescribed formality in
exercising power.
*
*Intent of donee to assume control of appointitive property for all
purposes is most commonly manifested by provisions in donee*=*s will
that blend owned property of donee with appointitive property. Requisite
blending can occur in a residuary clause disposing of both appointitive
property & donee*=*s own assets or in introductory clause stating that
donee intends appointitive property to be treated as her own property.*
*
Applies only to general powers & only when attempted exercise of general
power is ineffective or incomplete
*
*
Doctrine of allocation:
*
**
*Applies to special power of appointment, if donee blends both
appointitive property & donee*=*s own property in a common disposition,
blended property is allocated to various interests in such a way as to
increase the effectiveness of the disposition. Occurs when an allocation
is made to a party NOT an object of the special power--their allocation
must be from non-trust funds.*

*
To satisfy completely ineffective appointment, allocation requires that
donee have property of her own sufficient for appointitive property.
*
*Blending requirement may be met by a residuary clause disposing of both
appointitive property & owned property. Suppose A had bequeathed
appointitive property to B (not in the class) & her own property to D.
Since A did not blend property but had specifically bequeathed
appointitive property to B, appointment would fail & none of A*=*s owned
assets would be allocated to B.*
*

*
*
Failure to Exercise a Power of Appointment
Implied gift theory--recognized where donee has special power & class of
potential takers is small, court could imply a gift in favor of possible
takers & they would take in equal shares.

//
/Loring v. Marshall /(1985)
Donee exercised power of appointment to wife, income for life. No
exercise of appointment as to principal.
*
*Charities named as takers in default. They do not take as donee made a
partial appointment (to his wife) which was enough to wipe out their
default. Default must have occurred at time of donee*=*s death.*
*
Issue: what disposition should be made of the principal in the absence
of any explicit direction in the will?
Restatement & Scott on Trusts: when a special power of appointment is
NOT exercised & absent specific language indicating an express gift in
default of appointment, property not appointed goes in equal shares to
members of class to whom property could have been appointed.
*
*Implied gift theory--class of takers small, rather have class than
heirs of donor. Class here was nephew*=*s issue (one son--deceased after
dad) & wife--who could only, by terms of trust, take income of
trust--which left son as only class member who can take principal.*

*
____
imperative special power of appointment --creating doc shows intent that
permissible appointees are supposed to be benefitted even if donee fails
to exercise power. If special power is imperative, donee must exercise
it or court will divide assets equally among potential appointees.
In most cases it is not likely to make any difference whether a court
adopts an implied gift in default or an imperative power theory. Same
result is ordinarily reached under both because both are based on
inferred intent of donor.
*
*Example where difference results. Special power to wife to appoint to
one of four nephews. Upon failure to appoint, under implied gift theory
each nephew takes 1/4 share. But under imperative special power of
appointment, intent that gift go to one nephew requires court to choose
1, which they cannot--property goes back to donor*=*s estate.*
*
Construction of Trust Instruments
*
*Courts construe an instrument in order to construct an estate plan. In
the process, rules of construction are developed & must be heeded by
lawyers in constructing their client*=*s estate plans.*
*
Preference for Vested Interests
Preference for vested interest rather than contingent remainder. Vested
remainder NOT subject to destructibility doctrine (neither is
contingent), land more alienable, allows acceleration, not subject to
RAP (unless subject to open.)

Transferability & Taxation


Vested remainders, including defensibly vested ones, were transferable
inter vivos. Over 40 states have by statute or judicial decision made
contingent remainders transferable.
*
*A future interest, like a possessory estate, is an interest in property
& subject to federal gift & estate taxation. Where O *A*conveys property
in trust to A for life, then to B*@*, if B dies during A*=*s lifetime,
value of B*=*s remainder is subject to estate taxation because it is
transmitted at death. Federal estate & gift taxation turns on whether a
future interest is transmissible, not upon whether it is vested or
contingent. *
**

*Tax code provides that if the value of a remainder or reversion is


included in decedent*=*s taxable gross estate, decedent*=*s executor may
elect to postpone paying the tax until 6 months after termination of the
preceding life estate. *
**
*If a future interest is subject to gift or estate taxation, value of
the future interest depends upon life tenant*=*s life expectancy &
market rate of interest. Federal govt publishes life expectancy tables &
valuation tables for future interest that must be used.*
*
When future interest cannot be valued by resort to mortality tables,
(for example where it may be destroyed by trustee using principal to
support life tenant,) interest is valued with reference to all relevant
facts, including likelihood of contingent events happening.
To avoid potential taxation of future interest at death of its owner
prior to death of life tenant, do not create a transmissible future
interest. i.e., give remainderman power to transmit the future interest
at death by giving him a contingent remainder upon surviving plus a
special power of appointment--property subject to a special power of
appointment is NOT subject to estate taxation.

Acceleration into Possession


If an interest ends early, next /vested/ interest is accelerated into
possession.
*
*
ie., O to A for life, remainder to B
*
*A disclaims, B*=*s vested remainder accelerates into possession & now
have fee simple*
*

*
*//
/Contingent/ remainder does not accelerate because remaindermen is NOT
entitled to possession until they are all ascertained & any condition
precedent has occurred. When life tenant disclaims life estate, courts
decide the disclaimer on what T probably would have intended had he
anticipated disclaimer. Because this meant that almost every case of
disclaimer had to be litigated, legislatures passed disclaimer statutes.
Under these statutes, disclaimant is treated as having predeceased T, &
remainders take effect or fail proceeding on this assumption. State

disclaimer statute may be different from federal (which requires


disclaimer within 9 months after created.)
//
/In re Estate of Gilbert /(1992)
*
*Action: executor asks court to declare null & void a renunciation by
settlor*=*s son of his interest in 2 wholly discretionary trusts.
Executor*=*s duty to carry out settlor*=*s intention & disclaimer contra
to that intent. Executor joined by any potential children of son.*
*
Trust provision--Income to son for life, then to his issue
*
*Remainder interests in son*=*s trusts will be accelerated unless
settlor provided otherwise.*
**
*Son viewed as having predeceased settlor. Son has no issue--reverts
back to settlor*=*s estate*
**
*Under UPC, & similar uniform disclaimer acts, donee of a contingent or
defensibly vested interest may wait until 9 months after interest
becomes indefeasibly vested to disclaim. Permits contingent remainderman
to decide at life tenant*=*s death whether to accept the property or not.*
*
Tax policy: transfer tax imposed on each living generation. Federal govt
imposes a generation-skipping transfer (GST) tax upon any transfer to a
grandchild or other person 2 or more generations removed from the
transferor.
*
**
*i.e., T devises property in trust *A*for my daughter A for life, then
to my granddaughter B, if B survives A & if B does not survive A, to
B*=*s issue.*@**
**
*An estate tax is payable at T*=*s death & a generation skipping
transfer tax is payable at A*=*s death, when possession of the property
is transferred to T*=*s granddaughter. If A disclaims her life estate at
T*=*s death, a GST tax is payable at T*=*s death, when B takes
possession, rather than at A*=*s death.*
*

*
*
Surplusage
In a few situations, courts have treated words that might appear to
state a condition precedent as mere surplusage. Courts say that the
instrument means the same thing with or without the surplus words, & by
eliminating surplus words, the courts manage to vest the remainder.
*
*
i.e., O conveys to A for life, then to B for life if B is then living,
then to C.
A - life estate
B - remainder life estate, contingent upon surviving
*
*B - *A*then living*@*- some courts hold surplusage words, others view
as contingent remainder*
*

*
*//
/Edwards v. Hammonds/ (1683)
*
*O for life, then to O*=*s eldest son A & his heirs/if A attains the age
of 21/, but if A dies under 21, to O & his heirs.*
*
Surplusage is that in italics-- if A attains the age of 21. Court:
present devise to eldest son, subject to & defeasible by condition
subsequent--his attaining the age of 21.
O - life estate, contingent remainder, reversion subject to springing
executory limitation
A - eldest son, fee simple subject to shifting executory limitation to
grantor
*
*B- youngest son, could be contingent remainder subject to brother*=*s
shifting executory interest*
*

____
Where age contingency stated both as condition precedent & condition
subsequent--CP invalid.
//
/Edwards/ rule limited to age contingency & limited to gift to
individual--never to a class.

Requiring Survival to Time of Possession


*
*No requirement that a remainderman live to time of possession. If
remainderman dies before life tenant, the remainder passes to
remainderman*=*s estate.*
*

//
/First National Bankof Bar Harbor v. Anthony/ (1989)
*
*Revocable inter vivos trust with remainder to 3 kids. 1 kids dies
during life of settlor. Settlor dies without amending or revoking
trust--split between kids, with deceased B*=*s kids sharing dad*=*s
share & 2 living kids arguing that dead brother*=*s share divested upon
his death.*
*
Court: This is a vested remainder subject to divestment (subject t o
amendment or revocation of trust)--settlor never exercised amendment or
revocation powers--interest vested in all kids.
//
/Security Trust Co v. Irvine/ (1953)
Trust provisions:
*
*
Trust terminates upon death of life tenants--2 of settlors younger
spinster sisters--Mary & Martha.
*
*Upon termination--equally divided among my brothers & sisters (total of
5 sibs), their heirs & assigns forever, the[ issue of any deceased
brother or sister to take his or her parent*=*s share.] CS*

**
*
Interest in remainder vested upon death of T NOT upon death of last life
estate tenant.
*
*Rule--fact that life tenant is member of class, in absence of any clear
indication in will to contrary, does NOT prevent life tenant from
participating in remainder of T*=*s estate as a part of the class.*
*
If deceased sib had children, their share went to kids--subject to
divestment to their children.
If deceased sib had NO children, then divesting condition does not
arise--remainder interest goes as will devises--looks like power of
appointment.
Sibs without kids interest subject to estate tax--estate closed--their
shares to be distributed by trustee directly to persons entitled to
receive the same, the trustee first seeing that any taxes due are paid.
Divide & pay over--minority rule
gift to a class with no other words, remainder contingent on
survivorship. Class members must survive until property is divided in
order to share.

*
*Although courts do NOT imply survival requirements in gifts to
single-generational classes, such as *A*children*@*or *A*brothers &
sisters*@*, they do imply survival requirements in gifts to
multi-generational classes, such as *A*issue*@*or descendants.*@
**
*When T inserts word *A*surviving*@*in trust instrument, word is
ambiguous unless an additional word or words tell us at what time donee
must be surviving. Majority of cases view that *A*surviving*@*means
surviving to time of possession.*
*

*
*T bequests a fund in trust *A*for A for life, then to B, but if B dies
without issue surviving her, to C.*@
**

*Majority of courts favor terminating the trust on A*=*s death if B


survives A, & C can never take.*
*

//
/Lawson v. Lawson/ (1966)
O to Opal for life, at her death to her children, if any, in fee simple.
If no kids, to whole brothers & sisters of Opal.
Opal dies without kids & 2 of her brothers predecease her, leaving children.
Dispute between surviving sibs & children of deceased sibs.
Court: interest of sibs could NOT vest before death of life tenant, for
not until then could it be determined that she would leave no issue
surviving. J/surviving sibs.
______
//
/Lawson/ was wrongly decided. Overwhelming majority state that a future
interest made subject to some express condition precedent other than
survival is NOT also subject to an implied condition of survival.
//*////
/*Clobberies*=*s Case*/*(1677)*
**
*Where one bequeathed *A*a sum of money*@*to a person at her age of 21
years of age, or day of marriage,/to be paid /to her with interest-- if
person dies before either, money should go to her executor. *A*To be
paid at*@*combined with *A*with interest*@*made conveyance vested
remainder with enjoyment postponed. When remainder would have reached
21, estate will get money.*
*
If money given to one, to be/paid at/ the age of 21, if party dies
before, it shall go to executors. Vested with enjoyment postponed. If
die prior to 21, paid to executor when would have reached 21. Could not
give before 21 because estate would not be getting income (interest)
from principal.

If money were bequeathed to one at his age of 21, if he dies before that
age, the money is lost.
How about to A /when/ A attains 21? contingent if court interprets
/when/ as /at/.

Gifts to classes
Per Stirpes Distributions
*
*Law presumes that word *A*children*@*means only immediate offspring of
parent & does NOT include grandchildren. *
*
Sometimes question of whether T meant by children persons other than
immediate offspring. Sometimes courts have held that other language in
will or extrinsic circumstances indicate that T in fact meant descendants.
*
*Gift to *A*issue of A*@*. (pg. 792-793)*
*
If the issue take per capita--all issue born before the period of
distribution take an equal share
*
*
per stirpes or by right of representation--children of the child of the
designated ancestor take nothing if their parent is alive, & if the
parent is dead, the children take from the donor by representation
*
*strict per stirpes--divides descendant*=*s property into as many shares
as there are children of the descendant *
*
modern per stirpes--dividing property into shares at generational level
where a descendant is alive
*
*
UPC - per capita at each generation
R1 - per stirpes or by right of representation, given meaning as
representation has under intestacy statutes of particular jurisdiction
R2- use word issue without anything else, means use UPC per capita with
representation-- but use issue per stirpes use strict per stirpe.
UPC then issue or issue by representation means intestacy law else per
stirpes equal strict per stirpes.

Adopted Children
*
*In most states, adopted children presumptively included in gifts by T
to *A*children*@*, *A*issue*@*, *A*descendants*@*, & *A*heirs*@*of A.
But law of these states likely to have been developed by changing
judicial decisions & statutes over 20th century, &, since change may not
be retroactive, whether adopted child is included may depend on what law
was at T*=*s death in, say, 1955.*
*//
/Minary v. Citizens Fidelity Bank & Trust Co/ (1967)
*
*Trust where income to H & 3 sons with trust to terminate upon death of
last surviving B. Upon termination *A*distributed to my then surviving
heirs, according to law of descent & distribution then in force in Ky.*@
*
H dies, one son dies, & another dies leaving 2 kids. Third son adopts
wife to fall within class.
Court does not allow--adoption of an adult for purpose of bringing that
person under the provisions of a preexisting testamentary instrument
when he clearly was not intended to be so favored should not be permitted.
Cases split whether adult adoptees are included within class gift
terminology for purpose of will & trust disposition.
R2 provides that a gift to children of A does not include a child of A
adopted by another, if such adoption removes the child from the broader
family circle of the designated person.
Absent expression of a contrary intent by the testator, the term
children is presume not to include stepchildren or persons related only
by affinity.
Adoption, unlike marriage, is NOT revocable if relationship turns sour.

Nonmarital Children
Nonmarital children take same as marital children. Term lawful issue
includes generally nonmarital children.
Lawyers drafting wills often define words in order to avoid ambiguity.

Gift to Heirs
//
/Estate of Woodworth/ (1993)

*
*Absent evidence of T*=*s intent to contrary, identity of
*A*heirs*@*entitled to trust assets must be determined at date of death
of named ancestor who predeceased life tenant, not at date of death of
life tenant.*
*
To A for life, to B if she survives else her heirs.
B did not survive life tenant.
Life tenant dies 1991. Remainder dies in 1980.
If life of remainder B,--heirs are H, & niece & nephew
If life of life tenant--heirs are niece & nephew. (H dies after
remainder but before life tenant.)
Court--determine heirs of remainder when she dies, not when life tenant
dies. Early vesting rule.

Early vesting rule--unless a particular instrument disclosed a different


intent on part of T, a remainder to a class of persons, such as
children, become vested in class when one or more of its members came
into existence & could be ascertained, even though class was subject to
open for future additional members. Fact that takers of a postponed gift
were described by a class designation did not give rise to any implied
condition of survival.
This made remainder a transmissible interest when remainder died & would
be taxable.

Doctrine of Worthier Title


*
*Doctrines provides that when settlor transfers property in trust, with
a life estate in settlor or in another, and purports to create a
remainder in the settlor*=*s heirs, it is presumed that settlor intended
to retain a reversion in himself and not create a remainder in his
heirs. Rule of presumed intent and can be rebutted by evidence that
settlor did intend to create remainder in his heirs.*
**
**
*O to A for life, remainder to O*=*s heirs.*
*
Worthier title strikes remainder in heirs & give reversion to O. Note
reversion could be devised by O.

*
*
UPC abolishes doctrine of worthier title and R2 states that doctrine
exists in states where not specifically abolished.
Rule in Shelley=s Case
*
*Conveyance to A for life, remainder to A*=*s heirs*
*
Remainder becomes remainder in fee simple to A. Have merger here thereby
creating fee simple absolute in A.
*
*Not fee simple absolute where to A for life, then B for life, then to
A*=*s heirs.*
**
*Rule in Shelley*=*s case has been abolished in practically all states.
In some states the abolition by statute is fairly recent & does NOT
apply retroactively. In these states, cases involving the rule continue
to crop up from time to time.*
*

Decrease in Class Membership: Death of One of Several Life Bs


*
*Usually people in class have common characteristic. If have O grant
Blackacre to A, B & C--tenants in common. If A predeceases O, interest
falls into residuary clause & B & C take 1/3 each. But if members of
class, where one member predeceases T, other members succeed by right of
survivorship. B & C take *2*each.*
*
Assume no antilapse statute applies.

//
/Dewire v. Haveles/ (1989)
T survived by W, S & 3 grandkids (A, B, & C).
*
*Income to W for life, then Son , the widow of son & his children. *A*21

years after the death of the last surviving child of son, property of
trust shall be equally divided amongst the lineal descendants of my
grandchildren.*@
*
Son had 3 more kids by W2 (X,Y & Z.) Son dies leaving only 6 kids. Then
one kid dies leaving W & child.
*
*Issue: Who takes dead grandchild*=*s interest? other grandchildren or
deceased grandchild*=*s child?*
**
*RAP--violated. May not vest until 21 years after a life in being at
death of T, as grandkids were born after T*=*s death.*
*
This is a vested remainder in grandkids subject to open & does not close
until dad dies. They will all vest during life of son/dad. But
descendants of A,B,C,X,Y & Z will not be determined within 21 years of
life in being if X, Y, or Z are last grandchild surviving.
*
*Court adopted a wait & see policy stating that question decided at
death of last grandchild, when class gift of income from the trust will
terminate. (Note: Common law is to strike the provision--& would go back
to T*=*s estate.)*
**
*Language providing for such distribution may properly be considered in
determining T*=*s intention with respect to others of his will. Find
intent in what T intended to be done during 21 years between when vested
& principal paid, T must have intended descendants to receive income
during that period, so would intend that descendants of deceased
grandchild would get their income.*
*
_____
*
*When giving income to class of persons, do NOT dispose of principal
upon death of survivor. Instead, say *A*upon death of each life
tenant*@*& go on to provide what is to be done with the individual life
tenant*=*s share.*
*
Increase in Class Membership: Class-closing Rule
O to A then to children of B
*

*Class gift to children of B--when does it close? upon A*=*s death or


B*=*s death (physiologically closed)?*
*
Rule of convenience--class closes when any member of class can demand
possession, with full distribution to the present children & the
exclusion of all children later born to B.

Immediate gift
*
*Where there is immediate gift to class, class closes as soon as any
member can demanded possession, either at T*=*s death or later.*
**
*Exception to this rule: if no member of class has been born before
T*=*s death. Since T must have known there were no class members alive
at his death, it is assumed T intended all class members, whenever born,
to share. Class does not close until death of the designated ancestor of
class.*
**
*T bequeaths $10K to children of B who reach 21. B has children alive,
but no child is 21 at T*=*s death. Cass closes when a child of B reaches
21.*
**
*T bequeath*=*s $15K to children of B who reach 21. At T*=*s death, B
has 2 children under 21. 3 years later E is born to B. *
*
Thereafter C reaches 21--class closes (C entitled to possession) & C
gets 1/3.
F is now born to B--F is outside of class & takes nothing.
*
*D dies before turning 21--his share divided & C get *2*& other *2*kept
to see if D lives.*
*

Postponed gift
If gift is postponed in possession until a life tenant dies, class does
NOT close under class-closing rule until time of taking possession. Gift
to a class of remainderman does NOT close until life tenant dead, & does
not close under rule of convenience unless one remainderman is entitled

to possession.
Gift of income, when class closes does not matter. Class size can
increase or decrease until principal paid out.
Note: Use whichever comes first--close physiology or rule of convenience.

Gifts of specific sums


If specific sum is given to each member of class, class closes at death
of T regardless of whether any members of the class are then alive.
//
/Lux v. Lux/ (1972)
T creates trust for benefit of grandchildren & real estate shall not be
sold until youngest of grandkids are 21.
T survived by one son & 5 grandchildren. Son testifies intent to have
more children.
Distribution of trust corpus shall be made /at any time/ when youngest
of then living grandchildren has attained the age of 21.
*
*Latest time this class could close is upon death of T*=*s son. But
court opts for closing at above time --even though all kids could reach
21 & then mom & pop have another kid--that child will not take.*
*

Rule Against Perpetuities


Rule: No interest [in real or personal property] is good unless it must
vest, if at all, not later than 21 years after some life in being at the
creation of the interests.
*
*Rule limits time during which property can be made subject to
contingent interests to *A*lives in being plus 21 years.*@
*
Rule prohibits only those interests that may remain contingent beyond
perpetuities period.
All legal & equitable interests in property created in transferees
subject to RAP. All remainders & executory interests come within ambit
of RAP. Future interests retained by the transferor--reversions,
possibilities of reverter, & rights of entry--are NOT subject to RAP.
Donee MUST prove interest vests within perpetuity period.

RAP is rule of logical proof. Donee of an interest must prove that


interest will either vest upon creation or vest or fail thereafter
within 21 years after death of living persons who can affect vesting of
the interest (known as relevant lives.) If interest will not necessarily
vest or fail within this period, it is void at the outset.
*
*Inquiries: to pay income to A for life, then to A*=*s children for
their lives, then to pay principal to B.*
*
what are lives in being? A & B
*
*what is contingency? children*=*s life estate--but it vests at the time
of creation. *
*

Validating life or lives must be in being when perpetuities period


starts to run. Generally, perpetuities period begins when instrument
takes effect:
*
**
**
*- created by will, validating life or lives must be in being at T*=*s
death.*
*
- created by deed or irrevocable trust, validating life/lives must be
persons in being when deed/trust takes effect.
- created by inter vivos trust revocable by settlor alone, validating
life/lives must be persons in being when the power to revoke terminates.

*
**
**
*Find a validating life, if you find one at all, only among persons who
can affect vesting. Test each of these relevant persons to see if
interest will vest or fail during person*=*s life or within 21 years
after that person*=*s death. If there is no person among the relevant
lives by whom the requisite proof can be made, interest is void unless
it must vest or fail within 21 years.*
*

Requirement of No Possibility of Remote Vesting


Female Octogenarian
Female octogenarian usually appears in a 2-generation trust.
*
**
*T bequeaths a fund in trust for her sister *A*A (age 80) for life, then
for A*=*s children for their lives, then to distribute the trust assets
to A*=*s grandchildren.*@
*

*
**
*Law conclusively presumes that A is capable of having more children.
Due to this assumption, the secondary remainder to A*=*s children for
their lives may include an afterborn child of A, & the remainder of
A*=*s grandchildren might vest on the death of this afterborn child,
which is too remote. Remainder to A*=*s grandchildren is void.*
*

A has child B who has child C when T dies.


Relevant lives are A, B, & C.
A - life estate
*
*B - vested remainder life estate subject to open (class closes at A*=*s
death)*
*
C - vested remainder subject to open (closes when last child of A
dies--so if after born children could close 21 years after a life in being.)

A few states have statutes limiting the presumption of fertility in


perpetuities cases to statistically significant child-bearing years or
permitting the introduction in any case of evidence of capacity to bear
children.
The Unborn Widow
//

/Dickerson v. Union National Bank of Little Rock/ (1980)


*
*To M for life, to M*=*s widow for life, then principal to children of M.*
*
Lives in being: M, current wife & current children at time
M - life estate
*
*M*=*s widow - contingent remainder life estate (contingent on surviving M)*
*
Heirs of M - contingent remainder upon being an heir of M (surviving to
death of M)
Problem where M remarries and new wife was not a life in being when T
died. If new wife becomes widow, & lives longer than relevant lives,
heirs of M interest will not vest within the period.

The Slothful Executor


*
*A will may not be probated, or an estate distributed, for many years
after T*=*s death. Although distribution of an estate ordinarily is
completed within a few years after T*=*s death, in a few cases an estate
has been tied up for many years in litigation or the will has been found
many years after T dies.*
**
*Possibility of remote distributions gives rise to what are known as
*A*slothful executor*@*cases. *
**
*T devises property *A*to T*=*s issue living upon distribution of T*=*s
estate.*@*Because T*=*s estate may NOT be distributed for many years,
perhaps after all T*=*s surviving issue are dead, the gift of T*=*s
issue living at distribution may be held void.*
*
2 arguments can be made to save the gift:
- that distribution of the estate will not be delayed beyond a
reasonable time, which necessarily is less than 21 years.
- class of issue will close at time of distribution reasonably made.

*
*Some administrative contingency cases involve language that ought NOT
to be construed to create a CP to vesting. Examples are *A*to A upon
distribution of my estate,*@**A*to my issue when my debts are paid*@*, &
*A*to A upon probate of this will.*@*Language of this sort, not
requiring survival, should be construed as merely postponing possession
& not importing a CP.*
*
Application of Rule to Class Gifts
A class gift cannot be partially valid & partially void. It must be
valid for all members of the class, or it is valid for none.
2 questions:
- when will class close? Must be within time period. 2 ways to close:
physiologically or under rule of convenience where one member of class
could demand possession.
- If closes within rule, will all contingencies be resolved within the
period
Yes to both, gift is good. If no to either one, even if gift to only one
member of class does not vest within period, gift is void.
It does NOT necessarily follow from the closing of the class within the
perpetuities period that the gift is valid. Every member of the class
may be ascertained, but every member may not have satisfied some CP and
this too is required.

//
/Ward v. Van der Loeff/ (1924)
Under will, settlor created trust with income to wife for life with
power of appointment of the trust fund to children. In default of
appointment, equal shares to children of sisters & brothers.
*
*Relevant lives at time of T*=*s death:*
*
wife -- life estate, vested
mom & dad
brothers (A & B) & sisters (C & D) & their children (vested subject to
open & possibly to total divestment if W has children or if no children
appoints to one child.)
1) When will class of nieces & nephews close?
*

**
*
- Physiologically when their parents die & grandparents die since they
could still have more kids.
*
*- ****Under rule of convenience, living nieces & nephews can demand
possession upon W*=*s death*
**
**
**
*2) No CP*=*s to taking.*
*
Settlor then made a codicil to will:
*
**
*Trust to W terminable upon remarriage to non-British subject to be
split among nieces & nephews living at death of W or born at any time
afterwards. Also revoked W*=*s power of appointment.*
*

*
*
1) Class closes when life estate ends--whether by death or remarriage to
wrong person.
2) CP to sons who must attain age of 21, & CP daughters attain 21 or marry
*
*Class closed in time, & afterborn sibling (thru T*=*s parents) makes CP
possible to vest too late.*
*
Gift to nieces & nephew thru codicil void. Codicil valid to limit life
estate & revoke power.
*
*Invalid to takers in default--go back to will requirements in default
of appointment--which did not have CP*=*s to nieces & nephews*
*

___
*
*If nephew a T*=*s death, & W dies, class closes at that time.*
*

Create & Kill


T--> to grandchildren of A who reach age of 25
A is dead when T dies leaving 2 children (B & C) without kids.
Relevant lives are B & C.
T dies 1900.
B has a kid (X) in 1901.
B & C dies in 1902 & class closes.
But X will not reach 25 before the period closes.
Where grandchild X was in existence when T dies, he is a relevant life &
gift will vest within period when B & C die.
When T dies, A alive, children B & C alive & grandkid X is 25. Class of
grandchildren closes when T dies under rule of convenience.
When T dies, A is dead, & one grandkid is 25--rule of convenience makes
valid.
When T dies, A is dead, B & C are alive & X is 4. Relevant lives are B,
C & X. B & C could have another child, all relevant lives die & gift void.

Consequences of Violating Rule


Standard rule--any interest that violates RAP is struck out & the valid
interests are left standing.
*
**
*T bequeaths her residuary estate in trust *A*to pay income to my
children for their lives, then to my grandchildren for their lives, then
to distribute the principal among my great-grandchildren.*@
*
T is survived by children.
*
*Remainder to T*=*s great-grandchildren is void because the class will
not close until the death of T*=*s grandchildren, who may not all be in

being at T*=*s death. Standard rule is to leave the valid interest


standing, with a reversion in T*=*s heirs to become possessory upon
death of T*=*s grandchildren.*
*

*
*
Exception:
*
*Doctrine of infectious invalidity--if perpetuities violation so bad,
strike whole interest. Invalidity of one interest infects other valid
estates and cause them to fail.. Applied when the invalid gift is though
to be an essential part of T*=*s plan, and if it fails, T would prefer
other gifts to fail. May be applied to cause prior interest to fail or
cause other gifts in will to fail.*
*
Exceptions to Class Gift Rule
Gifts to subclasses
//
/American Security & Trust v. Cramer/ (1959)
T dies 1901
Residue of estate in trust:
income to wife for life then
*
2*corpus to T*=*s sister & brother*
**
2*corpus to Hannah for life *
**
*
to children of Hannah for life (vested upon death of Hannah, a life in
being--OK)
*
**
*then principal to the children*=*s heirs (closes when last child
dies--afterborn children make it possible to violate RAP)*
**

**
**
**
*Relevant lives at T*=*s death:*
*
W
Hannah
*
*Hannah*=*s 2 kids*
*
Hannash has 2 more kids.
Hannah dies 1915
W dies 1916.
*
*T*=*s heirs bring suit in challenging gift to Hannah*=*s grandchildren.*
**
*Court found that each child is a subclass of their heirs, with the
children being born prior to T*=*s death OK & those after T*=*s death
are invalid. Invalid interests go back to T*=*s estate.*
*
Subclasses stand or fall separately.

Specific Sum to Each Class Member


Another exception to the all-or-nothing class gift rule where there is a
gift of a specific sum to each member of the class.
*
**
*T bequeathed $500 apiece to each grandchild of his brothers, to be paid
at age 21. T has 2 brothers living at his death. Court held that, as a
matter of construction, applying the ordinary class closing rule
applicable to specific sum gifts, the gift benefitted only grandchildren
living at T*=*s death.*
**
*

Amount intended to be received by each member of the class is


ascertainable without reference to the number of persons in the class,
and hence each gift is tested separately under this rule.

Application of the Rule to Powers of Appointment


In applying RAP to powers of appointment, it is necessary to separate
powers into:
- general powers presently exercisable and
- general testamentary powers and all special powers.
Main concern is with testamentary and special powers.

General power appointment presently excisable by deed-*


*T devises to A for life, then A*=*s children for life, & each child has
general power by deed or will to say who will get principal.*
**
*Relevant lives are A & any of A*=*s children living at T*=*s life.
Children have right to exercise power upon A*=*s life, a life in being,
GP within rule.*
*
GP presently exercisable treated as absolute ownership for purposes of
Rule. To be valid must become exercisable or fail within period.
An unconditional power to revoke in one person is treated the same as a
GP presently exercisable if the holder can exercise the power to revoke
for his or her own exclusive benefit. Perpetuities period does not begin
to run until the termination of the power.
Where irrevocable trust, problem where T has more children after trust
created--when relevant lives determined.

General Testamentary Powers & Special Powers


Donor is treated as still controlling the property thru the exercise of
the power where a general testamentary power or special power. Time of
creation of power, not exercise, is critical time when perpetuities
period begins to run.
*
**
*i.e., T -->fund in trust to pay income to A for life, then to A*=*s
children for their lives & on the death of each child each child*=*s

share so go as he or she appoints by will.*


*

*
**
*Relevant lives: A, A*=*s child living at T*=*s death--B.*
**
*Create another child for A after T*=*s death--C.*
*
Kill off all relevant lives--A & B.
C enjoys life estate--vests within 21 years of death of relevant life.
C can not exercise power until death, which could be 21 years after the
death of a life in being.
Gift could be saved by treating B & C as subclasses.
*
*Discretionary power of distribution in a trustee is the equivalent of a
special power of appointment. i.e., income to A for life, then in
trustee*=*s discretion to pay income to A*=*s children.*@*A has no
children at T*=*s death. Discretionary power in trustee to pay or
accumulate is either partially or totally void.*
**
*Testamentary GP*=*s treated like special powers in determining validity
of appointment. Appointments under testamentary & special powers are
read back into instrument creating power. Perpetuities applicable to
appointed interests runs from the creation of the power.*
*
Doctrine of second-look
Any interest created by exercise of a testamentary or special power is
void unless it must vest, if at all, within 21 years after death of some
life in being at the date the power was created. Exercise of the power
is read back into the original instrument--but facts existing on the
date of exercise are taken into account. This means we wait-and-see how
the donee actually appoints the property, and then we determine on the
basis of the facts existing at the date of appointment whether the
appointitive interests will vest within the period (computed from the
date of creation of the power.)
Consider the facts at the time of exercise & read it back into original
document.
i.e., T--> to A for life, remainder to such persons as A appoints

outright or in further trust.


A - life estate & testamentary GP
*
*A appoints in further trust *A*to my children for life, remainder to
grandchildren in fee.*@
*
Read as if T has said.
*
*Relevant lives: A & A*=*s children living at T*=*s death.*
*
Grandchildren of afterborn children will violate RAP. If there are no
after born children of A--appointment is good. If there are afterborn
children, gift is void.

Savings Clauses
Provision stating that if by any chance any interest might violate RAP,
principle to be distributed upon death of survivors living at time of
creation. Savings clause may stipulate a different distribution scheme
in this event.

Attorney Liability for Violating Rule


*
*In an increasing number of jurisdictions, attys are liable to intended
B*=*s for negligently drafted instruments. Whether it is negligent to
draft an instrument that violates RAP is NOT settled.*
*

Alternative contingencies
Under this doctrine, if T expressly provides that a gift will vest upon
one of 2 events, one of which might occur too remotely, & the other of
which must occur, if at all, within the perpetuities period, the gift is
valid if the second (valid) contingency occurs but is void if the first
(invalid) contingency occurs.
Alternative contingencies doctrine applies only if T expressly separates
the contingencies; court will not separate them for T.

Perpetuities Reform
Extensive debate has erupted whether the RAP needs reform and if so, in
what manner.
Doctrine of Cy Pres
Edgerly v. Barker (1891)
*
*T devised the principal of a trust to such of his grandchildren as
reached the age of 40. Court, making an analogy to the cy pres doctrine
that reforms charitable trusts so as to approximate T*=*s general
charitable intent, reduced the age contingency to 21 and saved the gift.*
**
*Court might have inserted a saving clause adopted to the particular
possibility that causes the gift to be invalid, and in this manner,
interfere with T*=*s expressed wishes as little as possible.*
**
*Leading treatise writers on perpetuities law all approve judicial
reform of an invalid interest immediately upon T*=*s death. They
believed that T would prefer reformation to complete invalidity and that
reformation provides a simple and effective solution for what ails that
RAP.*
*
Doctrine of Wait & See
Essence of the wait-and-see doctrine is that we wait & see what actually
happens during the perpetuities applicable to the interest; we do NOT
invalidate an interest because of what might happen.
R2 & majority of states have adopted wait & see. States divided between
those waiting during the common law perpetuities period (life in being +
21 years) & state waiting for 90 years, as provided by Uniform Statutory
RAP.

Trust Administration
Duties of the Trustee
Office of trustee includes fundamental duty of undivided /loyalty/ to
Bs; trustee must administer trust solely in interest of Bs.
If trustee engages in self-dealing (realize personal gain other than
trustee fees), good faith & fairness to Bs NOT enough to save trustee
from liability. In case of self-dealing, /no further inquiry/ is made.
Bs can:
- hold trustee accountable for any profit made on transaction, or

- if trustee has bought trust property, can compel trustee to restore


property to the trust, or
- if the trustee sold own property to the trust, can compel trustee to
repay the purchase price & take back the property

One defense--authorized by settlor to self-deal or that Bs consented


after full disclosure. Even then, transaction must be fair & reasonable.
In determining what is self-dealing & what is conflict of interest but
not self-dealing, courts must assess whether danger of permitting
trustee to engage in action is so great as to make the action wholly
impermissible or only such as to make the action permissible is justifiable.
Trust pursuit rule - remedy afforded in equity for breach of trust. If
trustee, in wrongfully disposing of trust property, acquires other
property, B is entitled to enforce constructive trust on property so
acquired, treating it as part of the trust assets. Also applied where
property ends up in hands of a third person, unless 3rd person is a bona
fide purchaser for value & without notice of breach of trust.
i.e., where trustee sells own stock to trust, & some stock does poorly &
other stock does well, Bs can pick & choose which dealings to void as
self-dealing.

//
/Rothko/ (1977)
Conflict of interest case-- 3 executors liable for breach of conflict of
interest.
Conflict of interest transaction found to be made in good faith & fair &
in best interests of estate.
Liable for appreciation of art work
*
*If trustee is guilty of a breach of trust in selling trust property for
an inadequate price, he is liable for the difference between the amount
he should have received & the amount which he did receive. He is NOT
liable for any subsequent rise in value of the property. Where the
breach consists of some misfeasance, other than solely for selling
*A*for too low a price*@*or *A*for too little*@*, appreciation damages
may be appropriate. Where breach of trust consists of serious conflict
of interest & more than merely selling for too little. *
*
Co-Trustees
If there is more than one trustee, the trustees of a private,
noncharitable trust must act as a group and with unanimity, unless the
trust instrument provides to the contrary. One of several trustees does

not have the power alone to transfer or deal with the property.
One co-trustee may delegate to another co-trustee ministerial functions
that do not require the exercise of discretion.
Co-trustee may NOT delegate to another co-trustee discretionary powers,
which can be exercised only by co-trustees together. These powers
include the purchase or sale of trust assets, investment of trust funds,
allocation of receipts and disbursements between principal and income,
and discretionary payment of income or principal to Bs. Co-trustee is
liable for wrongful acts of a co-trustee to which he has consented or
which, by his negligence thru inactivity or wrongful delegation, he has
enabled, the co-trustee to commit. Improper for one trustee to leave to
others the custody & control of trust property.
Trustees must do everything together, unless authorized to have majority
vote.
In the case of charitable trusts, unanimity of action is NOT required of
trustees--action by a majority is valid.

//
/In re Heidenreich /(1976)
A fiduciary has an obligation to extricate itself from a conflict of
interest by either not qualifying to act as trustee or by selling an
unauthorized retention of stock of its own corp. If the conflict of
interest exists and a surcharge is to be leveled against the corp
fiduciary, the surcharge must also be leveled against the individual
trustee who should have insisted that the stock be sold or not purchased.
*
*Rule of undivided loyalty as applied to the retention of corp trustees
of shares of its own stock is subject to T*=*s authorization that they
be retained.*
*
_____
Retention or purchase of its own shares by a corporate trustee is NOT
self-dealing. Nonetheless, because the trustee cannot approach the
problem of selling or retaining shares with the same detachment it
applies to other trust assets--a special rule has developed that a
corporate trustee cannot invest funds in purchasing its own shares. As
for retaining its own shares where they were received by the trustee as
part of the original trust estate, majority of states hold that
retention is NOT proper unless authorized by terms of the trust.
T may waive the undivided loyalty rule and authorize a corp trustee to
hold shares of its own stock as a trust asset. Waiver reduces the
standard of good faith and permits the court to weigh the merits of the
transaction. An authorization to retain the securities coming into the
trust at the time of its creation ordinarily raises a presumption of waiver.
*

*If the trustee authorized to retain the initial investments in its own
stock, the trustee may retain additional shares given as dividends on
the theory that the trustee is maintaining the trust*=*s authorized
proportionate interest in the company. *
*
If the corporate trustee participates in a merger resulting in a new
corp, the new corp trustee can retain the new shares if they are
substantially equivalent to the old.
State are about evenly split on whether banks can vote their own stock
held in trust. Several states have statutes prohibiting a fiduciary from
voting its own stock in the election of directors.

Insider Trading
SEC 10b-5 provides that a person with inside information about a stock
cannot buy or sell the stock unless he first discloses the information.
*
*To minimize the risk of violating 10b-5, many banks have established
*A*Chinese Walls*@*between their commercial and trust depts in order to
prevent this internal flow of material inside information.
*A*Walls*@*are a set of rules that attempt to filter the communications
flow. SEX has stated that it will give weight to a wall--but a wall does
NOT insure the bank against breach of fiduciary obligation.*
*

Duties Relating to Care of the Trust Property


Duty to Collect & Protect Trust Property
Trustee has duty of obtaining possession of trust assets without
unnecessary delay. What is unreasonable delay depends upon the circumstances
Where a testamentary trust, trustee should collect the assets from the
executor as promptly as circumstances permit. Also owes duty to B to
examine the property tendered by the executor to make sure it is what
the trustee ought to receive--trustee must look at the act of the
executor and require the executor to redress any breach of duty which
diminished the assets intended for the trust.
Once having obtained the trust property, a trustee must act as a prudent
person in preserving it. If real property is involved, a trustee must
keep buildings in repair, guard against theft, pay taxes, & insure
against loss by fire. Also duty to sell non-producing property in a
reasonable time.

Duty to Earmark Trust Property

Exception to duty to earmark property is that a trustee may invest in


bonds payable to bearer instead of registering the bond in the name of
the trustee.
R2 & modern view--trustee is liable only for such loss as results from
failure to earmark & is NOT liable for such loss as results from general
economic conditions.

*
*Duty NOT to Mingle Trust Funds with the Trustee*=*s Own*
*
Trustee is guilty of a breach of trust if the trustee commingles the
trust funds with his own, even though the trustee does NOT use the trust
funds for his own purpose.
Commingled trust funds more difficult to trace & subject to risk that
personal creditors of the trustee can reach them.
Prohibition against commingling has been partially abrogated in almost
all jurisdictions to permit a corp fiduciary to hold & invest trust
assets in common trust fund.

Penalty to breach of duty to earmark or commingle, is strict liability


for loss--regardless is due to failure to earmark or keep separate.

Duty NOT to Delegate


Trustee has a duty to observe standard in dealing with trust assets that
would be observed by a prudent man dealing with the property of another.
If trustee breaches that responsibility, he is personally liable for any
resulting loss to the trust assets.
Trustee breaches the prudent man standard when he delegates
responsibilities that he reasonably can be expected personally to perform.
Trustee lacking investment experience must seek out expert advice--not
ordinarily justified in relying on such advice, but must exercise his
own judgment. Investment of assets one of the most important duties of
trustee--cannot blindly accept advice of experts.
*
*Common clause in trust documents permits trustee *A*to employ &
compensate attorneys, accountants, agents & brokers.*@
*
If trust suffered because poor investment were made, delegation of
investment authority would unquestionably be the cause of the loss.
Trustee NOT personally liable for losses not resulting from breach of
trust--i.e., embezzlement of assets by delegate.

*
*Nondelegation rule has been abrogated by R3 & by the Uniform Prudent
Investor Act (UPIA) which impose upon the trustee the duty of using
care, skill, & caution in selecting an agent, when delegating to obtain
the advantage of the agent*=*s specialized investment or other skills.
Trust must periodically the agent*=*s compliance with the authority
granted.*
*
Duty of Impartiality
Trustee has duty to deal with both income B & remainderman impartially.
Trust property must produce a reasonable income while being preserved
for the remainderman.
*
*Trustee can indulge a preference for keeping trust*=*s *A*inception
assets*@*, those placed in trust by settlor & commended to trustee for
retention. Impartial trustee must view the overall picture as it is
presented from all the facts, and not close its eyes to any relevant
facts which might result in excessive burden to one class in preference
to the other.*
*
Trustee is under duty to
to retain property which
although property yields
provision for amortizing

B who is ultimately entitled to principal not


is certain or likely to depreciate in value,
large income, unless he makes adequate
depreciation.

Where land held in trust appreciates in value to the point it becomes


under productive, and there are conflicting interest between Bs and
remainderman, the law will imply a duty to sell the land within a
reasonable time, even in those instances where T authorized trustee to
retain the assets.
Apportionment formula of R2-- or remedy where unproductive or under
productive property:
principal = _net proceeds _
__
1 + (period of year) (interest rate)

i.e., T devises Blackacre, unproductive land, in trust for A for lie,


remainder to B.
Blackacre is sold one year later--proceeds = $50K.
Current rate of interest = 6%.
Amount allocated to principal is $50K/1.06 or $47,170 and the amount
allocated to income = $2,830.

Stock dividends:
Ordinary dividends paid on stock held in trust are income belonging to
the income B.
Extraordinary dividends are treated differently.
Majority/Mass Rule/UP/R2: extraordinary dividends treated as income if
paid in cash, principal if paid in stock.
*
*Because of the insensitivity of the Mass rule, and other allocation
rules, trusts are usually drafted with a provision that the trustee
shall have discretion to allow receipts or expenses to principal or
income. Courts generally uphold trustee*=*s action if it is made
reasonably and in good faith. *
*

Duty to Keep and Render Accounts


In order to avoid expensive accountings, provisions are often inserted
in a trust instrument providing that judicial accountings should be
dispensed with and accounts rendered periodically to the adult income Bs
of the trust.
In the case of testamentary trusts, a few courts have indicated that a T
will not be permitted to dispense with statutorily required accountings.

Powers of the Trustee


General Managerial Powers

Powers of Investment

Liability of Trustee to Third Parties

Trusts
Table of Contents
Yzenbaard--Fall 1996
*