1 CONFIDENTIAL & PROPRIETARY Welcome to Seminar #4 Three Weeks Down – Seven more to go!! I will have the Week #3 assignment graded this weekend.

2 CONFIDENTIAL & PROPRIETARY General class information Before we cover this week’s information….I wanted to let you all know that next week is Week #5 (aka The Midterm Week) No seminar next week No Discussion Board next week All that is due in Week #5 is the Midterm Essay Exam…..

3 CONFIDENTIAL & PROPRIETARY For the Midterm Essay Exam…. There are four questions that you need to answer. There is no particular format. I just want to see well-written answers to each question that show you understand the information. Each answer/response need to be 1 to 2 pages long! AND please cite your sources (even if your source is the textbook!) Straight-forward assignment, right? Any questions?

4 CONFIDENTIAL & PROPRIETARY Now for this week (Week #4): We have our weekly quiz; We have 2 discussion questions (as usual); We have our next assignment too – which requires you to read the fact pattern about the Lear Family and then draft a Trust Agreement. ALSO, for this week’s seminar – I plan to refer to our textbook on a few occasions– so please get it out if you have it. You’ll be fine without it though!

5 CONFIDENTIAL & PROPRIETARY For the Week #4 Trust Agreement You should read about Kingston and Donna Lear, the fictional family discussed in Basic Wills, Trusts, and Estates for Paralegals on pages xxiv and in the Situational Analyses of Chapters 1, 2, and 3. This week, your assignment is to draft a trust for the Lear family. Assume that they want to establish the trust to pay for their grandchildren's educations, and then have the corpus distributed equally to the grandchildren at some point in time when they are all adults. The Lears want to place publicly traded stocks and bonds in the trust, valued at $387,000, plus $100,000 in cash. The Evan Jones Trust, found on pages in Chapter 4 of our textbook, will be helpful for this assignment. I will also be posting some helpful samples on the discussion board throughout the week.

6 CONFIDENTIAL & PROPRIETARY So let’s talk about Trusts…. A trust is a fiduciary relationship that has been created by a person (the settlor) making the trust. In a trust, the settlor transfers specific property or assets to another person (trustee). The trustee usually holds the legal title to the trust property (the corpus of the trust) for the benefit of another person (beneficiary). The property that is held in trust is known as the trust property, the trust corpus, the trust res, or the trust principal. The Statute of Frauds (certain contracts MUST be in writing) requires that a trust must be in writing if it deals with real property. The trust property or assets are administered and disbursed by the trustee for the beneficiary's benefit.

7 CONFIDENTIAL & PROPRIETARY Trusts are…. One popular estate planning option is to create a trust, either while the person is alive or as part of their will.

8 CONFIDENTIAL & PROPRIETARY A Trust is a Fiduciary Relationship…. In which property is transferred from a Trustor (aka Settlor), the creator of the Trust, to one or more persons, known as Trustees. The Trustees hold legal title to the property, subject to fiduciary duties impose by the trustor, to hold and use the property for the benefit of another individual, called the beneficiary, who holds the equitable title.

9 CONFIDENTIAL & PROPRIETARY The Trust is considered a legal entity in its own right…. With the Trustee and the Beneficiary each holding a portion of the complete title to the property. This relationship between the Trustee and the Beneficiary is not like the relationship of joint tenants or tenants in common in which each tenant owns a portion of the property itself; in a Trust the property is owned by the Trust, but each participant holds a portion of the title, not a portion of the property.

10 CONFIDENTIAL & PROPRIETARY The purpose of a Trust is…. To see that property is appropriately managed and its income disbursed to persons whom the Trustor wishes to benefit from the property.

11 CONFIDENTIAL & PROPRIETARY There are several benefits to creating a Trust rather than making an outright gift of the property to the beneficiary…. 1) The beneficiary may not be capable of managing the property, either because of age or infirmity, and by having a Trustee manage the assets, the Trustor would be assured that the property will produce an income for the beneficiary; 2) Because the Trust can be multi-generational, the Trustor can make sure that the assets will still exist for several generations and not be spent by the first generation beneficiary, leaving nothing for later generations.

12 CONFIDENTIAL & PROPRIETARY 3) By placing property in Trust during a person’s lifetime, that property is not considered owned by the person at death (with some exceptions we will cover in a few weeks when we talk about Tax issues), and therefore is not taxable or subject to the claims of intestate heirs. 4) If the Trustor normally provides support for another person or dependent, by placing property in Trust sufficient to produce the income that the Trustor typically gives to the Dependent, he will have shifted the income tax burden to the Trust and the beneficiaries, which may have more advantages, tax-wise….

13 CONFIDENTIAL & PROPRIETARY The trust is one of the most flexible and useful devices used in estate planning. A valid trust can be created for any lawful purpose that is not against public policy. The use of a trust can save the settlor taxes, avoid probate of the decedent's estate, and provide a person with the knowledge that he or she has some control over what will happen to his or her assets after death.

14 CONFIDENTIAL & PROPRIETARY The two basic types of trusts are: Testamentary and Inter Vivos…. Testamentary trusts take effect after the settlor's death. Testamentary trusts are subject to probate because they are usually written right into the will. Inter vivos, or "living trusts," take effect while the settlor is still living.

15 CONFIDENTIAL & PROPRIETARY Formation Of A Trust A trust is formed in several different ways. One way is through the will (testamentary trust) or during the settlor's lifetime (inter vivos trust). The trust must have the required elements of a trust and the testate must have had the intent to create a trust. When a trust is formed in a will, the testate must comply with requirements set out in the Statute of Wills. When a testate creates an inter vivos trust, he or she must comply with requirements set out in the Statute of Frauds.

16 CONFIDENTIAL & PROPRIETARY Basic example of a Trust: Example: Jacob decides to set up a trust for his children. He transfers his home and his stocks to Arnold. Arnold is charged with the administration of the property for Jacob's two children, Clarice and Simon, in accordance with the terms of the trust document. In this example, Jacob is the settlor, Arnold is the trustee, the property (the home and stocks) is the corpus, and the children are the beneficiaries. LET’S also look at 4 good examples on page 69 of our textbook of Trusts….

17 CONFIDENTIAL & PROPRIETARY Elements/Requirements of a Trust The basic elements of a trust are the settlor (also known as trustor or grantor), the trustee, and the beneficiary. The trust must have certain property (corpus) that is being placed in trust. The trust is different from other gifts or sales of property. When the trust is created, the title to the trust property is given to two persons. The title of the trust property is split into the following two parts: the equitable title and the legal title.

18 CONFIDENTIAL & PROPRIETARY Trust Requirements…. 1) a trustor 2) trust property 3) a valid trust purpose 4) a trustee 5) a beneficiary

19 CONFIDENTIAL & PROPRIETARY Duties and Responsibilities of the Trust Participants Each of the trust participants must possess qualifications that will enable them to carry out certain duties. Each of the participants has individual responsibilities and obligations. The main participants are: the Settlor, the Trustee, and the Beneficiary.

20 CONFIDENTIAL & PROPRIETARY The Settlor A settlor must qualify in order to make a trust. To qualify, he or she must own an interest in property that can be transferred. The settlor must have the power to dispose of that property and be able to enter into a valid contract. The settlor cannot be an incompetent, a minor, intoxicated, or insane. If a trust is created under duress or undue influence, it is voidable. After a settlor appoints a trustee, the settlor has no further duties, rights, or administrative responsibilities with respect to the trust property. However, the settlor may retain the right to cancel or revoke the trust. It is construed to be a revocable trust. If the settlor does not retain the right of rescission or revocation, it is an irrevocable trust.

21 CONFIDENTIAL & PROPRIETARY The Trustee A trustee can be either the settlor or someone appointed by the settlor. The trustee may be a natural person or a legal entity, such as a private corporation that has been authorized to act as a trustee. With the enactment of the Restatement of Trusts, married women and aliens residing in the United States may act as trustees. The person who is named or appointed as trustee has the right to renounce or reject the position of trustee. The trustee has the responsibility of holding legal title to trust property for the benefit of another person. Any person who has the legal capacity to hold, take, and individually own property may receive trust property as a trustee.

22 CONFIDENTIAL & PROPRIETARY The trustee must be capable of administering the estate. A minor or incompetent person cannot be a trustee. Even though they can own and hold property, most contracts that minors or incompetent people enter into are voidable. A voidable contract can be disaffirmed or canceled because one of the parties to the contract lacked the capacity to enter into the contract.

23 CONFIDENTIAL & PROPRIETARY The trustee has the responsibility of carrying out fiduciary duties pertaining to the trust using diligence, skill, and prudence. The main duties of a trustee are to manage the trust property, carry out the terms of the trust, keep accurate trust records, preserve the trust property from loss, and collect outstanding debts. A trustee can be removed from his position by an appropriate court, by the settlor, or by resignation. Some of the reasons for removal are the lack of capacity of the trustee, refusal to post bond or account for expenditures, an act which constitutes a breach of trust, long absence from the state, and showing favoritism to one of the beneficiaries.

24 CONFIDENTIAL & PROPRIETARY If the trustee (for whatever reason) is unable to serve, the settlor did not name an alternative trustee, and the settlor is incapable of naming a replacement trustee, a court with jurisdiction can appoint a replacement trustee upon request.

25 CONFIDENTIAL & PROPRIETARY The Beneficiary The beneficiaries of a trust must be definitely stated or described in the trust agreement for it to be a valid legal instrument. It is not necessary for a beneficiary to be able to enter into contracts. This is because a trustee has the legal title and control of the trust property. Therefore, a minor, an insane person, an incompetent, and a public or private corporation can all be beneficiaries of a trust. Many trusts are created because the beneficiary of the trust is not capable of managing the property. This may be because he or she lacks legal or mental capacity.

26 CONFIDENTIAL & PROPRIETARY Trust Property…. Almost any transferrable property can be made the subject of a Trust agreement. Transferrable property includes all real estate and tangible and intangible property. The only type of property that could not be subject of a Trust would be such items as government pensions, tort claims, and any other interest or item to which attaches a restriction on transferability. Let’s look at the 2 examples of Trust Property on pages of our textbook….

27 CONFIDENTIAL & PROPRIETARY Advantages of a Trust One of the major advantages of a trust is that both the settlor and the beneficiary are relieved of the responsibility of conserving and managing the trust property.

28 CONFIDENTIAL & PROPRIETARY Some of the other advantages of the trust are: Provides funds for children's educations Saves on taxes Provides funds to support spouse or other dependent family members Avoids probate for any assets that are transferred to the trust Allows the settlor to see the feasibility of the trust while he or she is still alive and to alter it if necessary Provides management of funds for those inexperienced in dealing with large sums of money

29 CONFIDENTIAL & PROPRIETARY Disadvantages of a Trust The advantages of a trust far outweigh the disadvantages. One disadvantage is that a trustor may prepare a trust agreement with his or her main intention of determining the feasibility of the trust and then making changes as needed. If the trust is not satisfactory to the settlor, there is the possibility that he or she may die before the trust is changed. If proper provisions have not been made for changes, the trust will stand as created.

30 CONFIDENTIAL & PROPRIETARY A Valid Trust Purpose…. A trust will not be valid if it violates any civil or criminal law…. Let’s take a quick review of the examples on pages of our textbook….

31 CONFIDENTIAL & PROPRIETARY Termination of Trusts…. There are six reason why/how a Trust may terminate. They are listed on pages of our textbook….so let’s review them now….