The Law of Trusts

The Law of Trusts

Browne C. Lewis

Associate Professor
Leon and Gloria Plevin Professor of Law & Director, Center for Health Law & Policy
Cleveland-Marshall College of Law, Cleveland State University

eLangdell Press 2013

About the Author

Professor Lewis graduated number one in her class with a degree in Political Science from Grambling State University. Prior to attending law school, Professor Lewis received summer fellowships to study at Carnegie-Mellon University, the Hubert H. Humphrey Institute at the University of Minnesota and the John F. Kennedy School of Government at Harvard University.

Professor Lewis started her professional career as a statistician and ADR trainer at the Conflict and Change Center in Minneapolis, Minnesota. Then, she clerked for the Honorable Daniel Wozniak, Chief Judge of the Minnesota Court of Appeals. Professor Lewis practiced in the areas of environmental, elder, family, housing and probate law. Professor Lewis spent most of her career working as a legal services attorney.

Professor Lewis is the Leon & Gloria Plevin Professor of Law and the Director of the Center of Health Law & Policy at Cleveland-Marshall College of Law. Prior to joining the faculty at Cleveland-Marshall, Professor Lewis was an associate professor at the University of Detroit Mercy School of Law, a visiting professor at the University of Pittsburgh School of Law, a summer visiting professor at Seattle University School of Law and a legal writing instructor at Hamline University School of Law. Professor Lewis has also taught in the American Bar Association CLEO Summer Institute.

Lewis is a member of the American Society of Law, Medicine & Ethics, the Health Care Compliance Association, the Public Health Law Association and the American Health Lawyers' Association. Professor Lewis is also a public member of the Board of the Joint Commission and a member of Cleveland State University's Institutional Review Board (IRB).

Professor Lewis writes in the areas of environmental, family and reproductive law. Her next most recent article on surrogacy and maternity is forthcoming in the St. John’s Law Review. Professor Lewis has recently completed a book on paternity and artificial insemination for New York University Press. In 2010, Professor Lewis' casebook on the inheritance rights of children was published by Carolina Academic Press.

Notices

This is the first version of this casebook. Visit http://elangdell.cali.org/ for the latest version and for revision history.

This work by Browne C. Lewis is licensed and published by CALI eLangdell Press under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported License. CALI and CALI eLangdell Press reserve under copyright all rights not expressly granted by this Creative Commons license. CALI and CALI eLangdell Press do not assert copyright in US Government works or other public domain material included herein. Permissions beyond the scope of this license may be available through .

In brief, the terms of that license are that you may copy, distribute, and display this work, or make derivative works, so long as

·  you give CALI eLangdell Press and the author credit;

·  you do not use this work for commercial purposes; and

·  you distribute any works derived from this one under the same licensing terms as this.

Suggested attribution format for original work:

Browne C. Lewis, The Law of Trusts, Published by CALI eLangdell Press (2013). Available under a Creative Commons BY-NC-SA 3.0 License.

CALI® and eLangdell® are United States federally registered trademarks owned by the Center for Computer-Assisted Legal Instruction. The cover art design is a copyrighted work of CALI, all rights reserved. The CALI graphical logo is a trademark and may not be used without permission.

Should you create derivative works based on the text of this book or other Creative Commons materials therein, you may not use this book’s cover art and the aforementioned logos, or any derivative thereof, to imply endorsement or otherwise without written permission from CALI.

This material does not contain nor is intended to be legal advice. Users seeking legal advice should consult with a licensed attorney in their jurisdiction. The editors have endeavored to provide complete and accurate information in this book. However, CALI does not warrant that the information provided is complete and accurate. CALI disclaims all liability to any person for any loss caused by errors or omissions in this collection of information.

About CALI eLangdell Press

The Center for Computer-Assisted Legal Instruction (CALI®) is: a nonprofit organization with over 200 member US law schools, an innovative force pushing legal education toward change for the better. There are benefits to CALI membership for your school, firm, or organization. ELangdell® is our electronic press with a mission to publish more open books for legal education.

How do we define "open?"

·  Compatibility with devices like smartphones, tablets, and e-readers; as well as print.

·  The right for educators to remix the materials through more lenient copyright policies.

·  The ability for educators and students to adopt the materials for free.

Find available and upcoming eLangdell titles at elangdell.cali.org. Show support for CALI by following us on Facebook facebook.com/caliorg> and Twitter <@caliorg>, and by telling your friends and colleagues where you received your free book.

Table of Contents

About the Author iii

Notices iv

About CALI eLangdell Press v

Preface viii

Chapter 1 - The Capacity to Create a Testamentary Trust 1

1.1. Parties Involved in a Trust Arrangement 2

1.2. Testamentary Capacity 4

Chapter 2 - Creation of a Private Trust 46

1.2 Intent to Create a Trust 46

2.2 Requirement of Trust Property 53

Edwards v. Edwards 54

2.3 Necessity of Trust Beneficiaries 63

Chapter 3 - Categories of Private Trusts 71

3.1. Private Expressed Trusts 71

3.2. Trusts Created By Operation of Law 93

Chapter 4 - Discretionary and Support and the Rights of the Beneficiary’s Creditors 122

4.1 Discretionary Trusts 125

4.2. Support Trust 131

Chapter 5 - Spendthrift Trusts and Creditors 140

5.1 Expressed Spendthrift Trust 141

5.2 Implied Spendthrift Trust 142

5.3 Creditors 149

Chapter 6 - Modification and Termination of Trusts 174

6.1 Termination 175

6.2 Claflin and Material Purpose 183

6.3 Deviation and Changed Circumstances 186

6.4 Removal of the Trustee 194

Chapter 7 - Creation and Modification of Charitable Trusts 201

7.1 Creation of the Charitable Trust 201

7.2 Modification/Cy Pres 207

Chapter 8 - Supervision/Enforcement of Charitable Trusts 237

8.1 Donor Standing 237

8.2 Beneficiary Standing 248

Chapter 9 - Treatment of Trust Property 254

9.1 The Duty to Collect and Protect Trust Property 254

9.2 The Duty to Earmark Trust Property and to Not Comingle Trust Funds 254

9.3 The Duty Not to Delegate 260

9.4 Duty of Prudence 261

Chapter 10 - Duty of Loyalty 282

Chapter 11 - Duty of Impartiality 302

Chapter 12 - Duty to Account and Inform 323

12.1 To Account 324

12.2 To Inform 346

12.3 The Trustee’s Liability 358

Preface

Recently, the public waited patiently to find out the contents of Whitney Elizabeth Houston’s will. People were entertained by her music and fascinated by her death. Thus, it is no surprise that they were on the edge of their seats to discover how much money she had in her estate. Inside Edition and other entertainment shows teased the public with previews stating that they had received a copy of the will and planned to reveal its contents. The big reveal fell short when the public realized that Houston had left everything to her daughter using a testamentary trust. Wills are public documents, but trust instruments are not. Therefore, the public will never know the specific provisions contained in the trust document. Privacy is one of the reasons why more and more people are disposing of their property using testamentary trust created in their wills. The reasons people establish trusts are as varied as the lawyers who draft them. Traditionally, trusts were vehicles wealthy people used to provide for their love ones. Currently, people from all economic classes establish trusts. Thus, for students desiring to practice in the probate or elder law arena, it is crucial that they have a basic understanding of the law of trusts.

The standard four-credit Wills & Trusts courses taught at most law schools do not spend a sufficient amount of time on the law of trusts. Professors teaching such courses have the daunting task of teaching intestacy, wills, non-probate transfers, estates, and trusts. The semester is not long enough to give detail coverage to all of the important topics. Consequently, professors have to decide what material to omit. Typically, the material on the law of trusts is either omitted or severely shortened. One obvious reason for the treatment of the trust information is the fact that the chapters on trusts are in the latter part of most casebooks. It is difficult to predict the pace at which the material will be covered. Thus, most professors have to adjust their reading assignments. Those adjustments usually require the professors to cut assigned materials. Frequently, by the time the decision to reduce the reading assignments needs to be made, the only significant material left to be covered are the chapters on the law of trusts. Hence, that material is routinely omitted.

The use of testamentary trusts is becoming an important part of estate planning. As a result, students who want to make a living as probate attorneys will need to know how trusts fit into estate planning. In addition, bar examiners realize that it is important for students to have a basic knowledge of trust law. That realization will result in bar examination questions that test that knowledge. The Law of Trusts is designed for use as a supplementary text for a course on wills and trusts and the primary text in a seminar or course exploring the law of trusts.

Since the settlor is dead when the testamentary trust becomes effective, the testamentary trust is an irrevocable trust. The main focus of this book is on that type of trust. However, the revocable inter vivos trusts will be briefly mentioned as it relates to the testamentary trusts. Most of the legal issues surrounding the law of trusts come from challenges to the creation and implementation of the trusts. In addition, even if the testamentary trust is deemed to be valid, the actions of the trustee may lead to litigation. This book is divided into two components to address the issues that arise in those two types of litigation.

Part I explores the legal issues involved in the creation, modification and implementation of private and charitable trusts. In order to have a trust invalidated, the opponent must successfully challenge the capacity of the settlor or the procedure used to create the trust. Part I contains a chapter that examines the level of mental ability a person must have to create a trust. Other chapters in this part explains the steps that must be taken to create, modify and terminate a trust and compares the various types of private trusts.

Part II discusses the administration of private and charitable trusts. In particular, the part focuses upon the numerous duties of the trustee. Trusts are usually created to protect a person who is vulnerable in some way. In a lot of respects, that person is at the mercy of the trustee. Any decision that the trustee makes, good or bad, directly impacts the beneficiary. In order to protect the beneficiary from the actions of the trustee, the law imposes a fiduciary duty on the trustee. Chapters in Part II analyze the trustee’s duties and the remedies available to the beneficiary in the event of the trustee’s breach of any of those duties. Part II also includes a discussion of powers of appointments and their relevancy to trusts. This discussion is necessary because bar examinations frequently contain questions dealing with powers of appointment.

In additional to cases, the book contains problems, notes and questions. The cases are designed to give the student a clear understanding of the law. The problems are included to permit the student the opportunity to apply the law. The notes and questions are provided so the student will think critically about the policies behind the law and the outcome of the cases.

vii

Chapter 1 - The Capacity to Create a Testamentary Trust

This chapter is divided into two parts. Part I introduces students to the parties that are involved in the creation of a trust. Further, that part discusses the function of each of the parties. Most trusts are testamentary in nature, so they are created as a part of a will. In order for a testamentary trust to be valid, the testator must be legally capable of executing the trust. Thus, in Part II of the chapter, I discuss the mental capacity the testator must possess to be deemed competent to create a trust. In addition, the students will be introduced to the other legal theories that may be used to attack the testator’s ability to establish a trust.

The primary purpose of a trust is to provide a source of income for a person who is not capable of managing his or her resources. For instance, Barbara’s son, John has a gambling problem. Barbara wants to make sure that John always has a place to live. If Barbara gives John a house outright, he would probably lose it in a card game. Barbara cannot give John the house and forbid him from transferring it because a direct restraint on alienation is invalid. Thus, the court would ignore the condition and give John the house without the restriction. Barbara can give John a life estate in the property, so that he would have a place to live until he died. Granting John a life estate may not be a good idea for several reasons. A legal life tenant has a duty to pay taxes and to maintain the property in good repair. However, that duty is limited because the life tenant only has to fulfill that obligation to the extent the income from the property is sufficient to cover those expenses. It is unlikely that the house will produce any income, so John would not be obligated to pay the property taxes or to keep the house in good repair. Even if John has such a duty, he is probably too irresponsible to do so. Thus, giving John a life estate in the house may cause more problems than it cures. Moreover, if the life tenant accrues debt, that person’s creditor can legally seize the life estate and sell it. The creditor would probably realize very little from the sale. But, the sell of the life estate will defeat Barbara’s purpose of providing John with a place to live. Barbara’s best option is to put the house in trust for John. This means that Barbara would give the legal title of the house to a third party. That person would be responsible for maintaining the house for John. As the beneficiary of the trust, John would have equitable title of the house. Since John would not have legal title, he would be unable to sell or gamble away title to the house. Thus, the creation of a trust would enable Barbara to achieve her objectives.