Elements of A Trust

ELEMENTS OF A TRUST
Settlor
Trustee Property (res)

Trust
Beneficiary
ELEMENTS OF A TRUST
Settlor
“John Smith, Trustee” Property (res)

Trust
Beneficiary
¾Trustee has power to do transactions (legal title)

¾Beneficiary has right to enjoy property (equitable title)
¾Result: trust separates management and beneficial
ownership
ELEMENTS OF A TRUST
Settlor
Trustee Property (res)

Trust
Beneficiary
9 Testamentary or inter vivos

9 Revocable or irrevocable
ELEMENTS OF A TRUST
Settlor
Intent Required Elements for a

VALID trust:
¾Settlor (Grantor,
Trustee Property Trustor))
Trust
¾Intent to create trust
¾Trust property (Res)
Beneficiary ¾Beneficiary
ELEMENTS OF A TRUST
Settlor
Intent to create a trust
Trustee Property
Trust
Beneficiary
¾ Intent to create is required. Intent can be

negated just as with Wills….
Terms in a Testamentary Trust:
“I devise my entire estate to my wife Gay. I

recommend to her the care of my mother and sister,
and request her to make such gift and provision for
them as in her judgment will be best.” Colton v. Colton,
p. 501 (1888) (not assigned).
¾ Did this Testator intend to create a trust?
¾ Intent determined by court based on:

Language of alleged trust document, and
Context (facts and circumstances)
Revision by a more careful attorney:
“I devise my entire estate in trust to my wife Gay.

I recommend to her the instruct her to care for my
mother and sister, and request her to make such gift
and provision for them as in her judgment will be best
is required for their support.”
¾ Precatory language will make a trust invalid,

because no intent.
Precatory language can have its uses:
“I devise my entire estate to my wife Gay. I ask, but do

not require, Gay to care for my mother and sister, and
request her to make such gift and provision for them as
in her judgment will be best. These terms are not
intended to create a trust with respect to the property
devised to Gay, or any rights on the part of my mother
or sister with respect to such property.”
¾ Other uses for precatory language: “precatory

letter”
ELEMENTS OF A TRUST
Commissioner v. Brainard, pp. 511-12
Settlor
Intent
Trustee Res
Trust
Beneficiary
Commissioner v. Brainard
Brainard
Intent
Trustee Future Profits

Trust
Wife, Mom, Kids

Commissioner v. Brainard
Brainard made a declaration to wife and mother that

he would put future trading profits in trust for them and
children.
¾ No writing.
¾ Why?
¾ Sometimes, not even a declaration is required….
¾ “Made declaration.” How about “made a

promise”?
ELEMENTS OF A TRUST
Settlor
Intent
Trustee Property
Trust
Beneficiary
Trust must have an ascertainable beneficiary. Clark v.

Campbell (not assigned): Provision in Testamentary
Trust:
“I direct my executor to distribute $1,000 to each of my
friends.”
ELEMENTS OF A TRUST
Settlor
Intent Required Elements for a

VALID trust:
¾Settlor (Grantor,
Trustee Property Trustor))
Trust
¾Intent to create trust
¾Trust property (Res)
Beneficiary ¾Beneficiary
Marsman v. Nasca, p. 534
Sara
Farr $
Trust
Cappy (primary)
Sally and family

(remainder)
Trust distributions provision of Sara’s Will:
“I give to my trustees…one-third (1/3) of the residue

of my estate;…they shall pay the income therefrom
to [Cappy] at least quarterly during his life; and after
having considered the various available sources of
support for him, my trustees shall, if they deem it
necessary or desirable from time to time, in their sole
and uncontrolled discretion, [distribute to Cappy]
such amount or amounts of the principal as they
shall deem advisable for his comfortable support and
maintenance.”
FIDUCIARY DUTY
Fiduciary’s duties:
¾ Loyalty
¾ Prudence
¾ Impartiality between beneficiaries
¾ Put beneficiaries’ interests ahead of his or her
own interests
¾ Carry out intent of settlor
¾ Fiduciary duty is highest legal duty
Imagine complete discretion for trustee:
“The beneficiary of the trust is Cappy for the duration

of his life, remainder to Sally. My trustees shall
make distributions at their sole and uncontrolled
discretion.”
Imagine complete discretion of trustee:
“The beneficiary of the trust is Cappy for the duration

of his life, remainder to Sally. My trustees shall
make distributions at their sole and uncontrolled
discretion.”
Trustee still has duties of:

¾ Loyalty
¾ Prudence
¾ Impartiality between beneficiaries
¾ Put beneficiaries’ interests ahead of his or her
own interests
¾ Carry out intent of settlor
Trust distributions provision of Sara’s Will:
“I give to my trustees…one-third (1/3) of the residue

of my estate;…they shall pay the income therefrom
to [Cappy] at least quarterly during his life; and after
having considered the various available sources of
support for him, my trustees shall, if they deem it
necessary or desirable from time to time, in their sole
and uncontrolled discretion, [distribute to Cappy]
such amount or amounts of the principal as they
shall deem advisable for his comfortable support
and maintenance.”
Sara
Farr $
Trust
Cappy (primary)
Sally and family

(remainder)
Extended Discretion – Practically Speaking
Grandparent
Client $ (For Education )

(Trustee) Trust
Grandchild
¾ Who pays trustee’s legal fees?

¾ What is beneficiary’s remedy (generally)?
Prudent Investor Rule 22
Effect of inflation on purchasing power.

Tex. Uniform Prudent Investor Act § 117.004(c)(2).
1969-2005: Consumer Price Index averaged 4.8%/year
$1,000 Î $175
1969 Ford Mustang 2005 Ford Mustang

Base Price $3,100 Base Price $19,100
In 35 years, Ford Mustang price up 600%.

Past performance is not a guarantee of future performance.
Posey Capital Management Uniform Prudent Investor Act
Consider “total return from income and appreciation of capital.”

See Tex. UPIA § 117.004(c)(5).
Historical Performance of Asset Classes

Money Market Funds 80 Years: 1926-2005
$ 10.4%
Principal + Interest
5.5%
Bonds 3.7%
Money Market Bonds Stocks

Stocks Funds (US Large Companies
S&P 500 Index)
$ Source: Historical Performance of Asset Classes: return on stocks courtesy of
Center for Research on Securities Prices (CRSP), CRSP Decile 1-2, 1926-
2004; return on bonds Long-term Government Bond Index, 1926-2004; for
Company Profits: return on cash equivalents used return on one-month Treasury bills, 1926-
Dividends + Growth from 2004; inflation U.S. Consumer Price Index, 1926-2004.
Reinvestment in Company

Consider the effects of inflation.

Tex. UPIA § 117.004(c)(2).

$ 10.4%
5.5%
Bonds 3.7%
3.0%
$
Inflation Money Market Bonds Stocks

S&P 500 Index)
$ Source: Historical Performance of Asset Classes: return on stocks courtesy of Center for
Research on Securities Prices (CRSP), CRSP Decile 1-2, 1926-2004; return on bonds
Long-term Government Bond Index, 1926-2004; for return on cash equivalents used
Company Profits: return on one-month Treasury bills, 1926-2004; inflation U.S. Consumer Price Index,
Dividends + Growth from 1926-2004.

Consider the effects of inflation.

Tex. UPIA § 117.004(c)(2).

ADJUSTED FOR INFLATION
$ 7.4%
2.5%
Bonds 0.7%
3.0%
$

S&P 500 Index)

Consider taxes.
See Tex. UPIA § 117.004(c)(3).

ADJUSTED FOR INFLATION AND INCOME TAXES
$
5.8%
1.0%
Bonds
3.0%
$ -0.4%

S&P 500 Index)

Dennis v. Rhode Island Hospital Trust Co., p. 821.
Great Grandmother
Trust Co. 3 Rental Properties

Trust
Her Issue (great grandchildren)
Trust terminates 1991:

remainder to
great grandchildren
Damages
Dennis v. Rhode Island Hospital Trust Co.
9 Court’s formula:
• $160,000
• + ($160,000 * 3.6% * 32 years) = $344,000.
9 But the 32 years should be a power:
32
• $160,000 * (1.036 ) = $500,000.
^please correct this number from 1.04 to 1.036
9 Court used 3.6% inflation rate:

• Actual inflation rate 1950-1981: 4.2%
• Inflation-adjusted damages $600,000.
Damages
“A breaching trustee may be charged with the amount

required to restore the values of the trust estate and trust
distributions to what they would have been if the trust had
been properly administered.”
Restatement (Third) of Trusts § 205 (1992) (Uniform Trust Code is similar).
¾ WHAT MEASURE OF DAMAGES WOULD REALLY

ADEQUATELY COMPENSATE THE BENEFICIARIES?
Possible Values of
$160,000 Invested in 1950
$160,000
Average Invested
Annual Jan. 1, 1950
Return, Value Value
Benchmark 1950-2005 1981 2006
Inflation 4.2% $600,000 $1,600,000

Money market funds 4.9% $750,000 $2,400,000
5-yr US Treasury Notes 6.2% $1,100,000 $4,700,000
Balanced Stock and Bond Portfolio 9.9% $3,300,000 $32,000,000
Stock Portfolio 11.9% $5,800,000 $86,000,000
Sara “I give to my trustees…one-third

(1/3) of the residue of my
estate;…they shall pay the income
therefrom to [Cappy] at least
quarterly during his life; and after
Farr $ having considered the various
Trust available sources of support for
him, my trustees shall, if they
deem it necessary or desirable
from time to time, in their sole and
uncontrolled discretion, [distribute
Cappy (primary) to Cappy] such amount or
amounts of the principal as they
shall deem advisable for his
comfortable support and
Sally and family maintenance.”
(remainder)
Scheffel v. Krueger, p. 549
Trust distribution provisions of grandmother’s Will:
9 Income to beneficiary (Krueger) quarterly
9 Principal distributed at trustee’s discretion for the

maintenance, support and education of the beneficiary
9 Beneficiary can invade the principal beginning in 2016

(this case dated 2001)
Spendthrift provision: “No principal or income…shall be

subject to…assignment by any beneficiary…or to the
interference or control of any creditors…or to any debt or
liability of…beneficiary….”
FTC v. Affordable Media
Protector Settlor
Trustee $
Trust
Beneficiary
Settlor
(Andersons)
Trustee $ Millions
Trust
Beneficiary
(Andersons)
Protector Settlor
(Andersons) (Andersons)
Co-trustees
(Andersons $ Millions
and Cook Trust
Islands
Trustee)
Beneficiary
(Andersons)
Partition Agreement Between the Spouses
Before Agreement After Agreement
Community Separate Separate

Property Property Property
Husband Husband Wife

and
Wife
Corporation
Before Restructuring After Restructuring
Client Client
100%
Corporation
100%
100%
Property Property
Corporation
Client Client
100%
Corporation
100%
100%
Property Property
Family Limited Partnership
Client Client
100%
99% limited
partners
(have no
Limited control)
Liability
Company
100% 1% general
partner (has
control)
Limited
Partnership
100%
Property Property
Estate Planning
Objectives
9 Know answers to these questions from your clients:

Do I need a will?
Do I need a living trust?
Do I need to worry about estate tax?
How can I use trusts?
9 Revised notes are available for download:

www.poseycapital.com
Click “My Finances”;
Click “Web Resources”
Estate Planning: When Does Client Need a Will?
Without a valid will, decedent’s property passes by one-size-

fits-all statutory provisions. Avoid intestacy if:
9 Substantial assets (other than tangible personal
property of insignificant value), UNLESS property will
pass by will substitute:
JTWROS
Retirement plans (e.g., 401(k), IRA, pension plan)
POD accounts
Life insurance
Trusts
9 Minor children
9 Estate over lifetime exemption amount for estate tax
(currently $2,000,000)
INTESTACY IN TEXAS
Determine first whether the deceased's property is separate or community. If the deceased is not married, the
property is separate and will be governed by Section 38 of the Texas Probate Code. In addition, as a general rule,
other separate property will include (1) gifts/inheritance; (2) property acquired in another state during marriage which
is not community property under the laws of that state; (3) all property owned prior to marriage. Section 45 of the
Texas Probate Code governs community property.
• Separate Property
– If both a spouse and a child or children survive the deceased:
• Personal property: the spouse gets one-third and the remaining two-thirds go to the children.
• Real property: the land goes to the children equally subject to a life estate in one-third of the land by
the surviving spouse.
– If deceased is survived by spouse, but no children.
• Personal property: To surviving spouse.
• Real property: surviving spouse gets one-half, the deceased's father gets one-fourth and the
deceased's mother gets one-fourth. If one or more of the parents predeceases the decedent, then the
portion that would have gone to that parent goes to the deceased's brothers and sisters and their
descendants. If one parent survives, but no brothers or sisters survive, then one-half of the land will
go to the surviving parent. It is only if there are no surviving brothers, sisters or parents then the
spouse inherits all of the land.
– If deceased does not have a surviving spouse, but does have surviving children:
• Both personal and real property are divided equally among the children.
– If the deceased has no surviving spouse and no surviving children: If both parents are living, then the
estates goes one-half of everything to each surviving parent. If only one parent survives, then one-half of
the estate will go to that parent, and the other one-half will be divided equally among siblings. If there are
no siblings, then the surviving parent gets everything. If no parent survives, but there are siblings, the
estate is divided equally among the surviving siblings. If no parent and no siblings survive, the law will still
attempt to avoid escheat, but it is too complex to cover in this writing.
• Community Property
– If decedent is survived by a spouse and is not survived by children or grandchildren: All community
property passes to the surviving spouse.
– If decedent is survived by a spouse and children or grandchildren where all such children or grandchildren
are also the children or grandchildren of the surviving spouse: All community property passes to the
surviving spouse.
– If decedent is survived by a spouse and children or grandchildren, but the children or grandchildren are not
also the children or grandchildren of the surviving spouse: The spouse retains one-half of the deceased's
spouse's community estate and the other one-half goes to the children/grandchildren of the deceased.
¾ When does your client need a will? When substantial

property will not pass by will substitute, intestacy statute
may not direct it where decedent wants it to go.
¾ For planning purposes, you don’t need to know where
the intestacy statute will direct the property:
You just need to know that if there is substantial property that
does not pass by will substitute, a will is needed:
It would likely cost the client more in legal fees to completely
figure out the application of the intestacy statutes to all of
his/her property, than to do a simple will.
Proof that making assumptions about where intestacy will
direct the decedent’s property is a bad idea. Doug and
Diane are married with two small children. Primary asset is
home and land, worth about $1,500,000 (with no mortgage),
which Doug inherited from his parents. They assume that if
Doug dies Diane will receive the house in intestacy.
¾ Texas: at Doug’s death, Doug’s separate property
goes to his children, while Diane has a life estate in
1/3rd of the property. To sell the home, a guardian must
be appointed for each of the children.
¾ Other States: Spouse may get 1/3rd of community

estate, each child 1/3rd.
¾ Why does Doug’s separate property go to children?

More proof that assumptions about where intestacy will
direct property are a bad idea. Sally and Sal are married,
no children. All their property is community property. From a
prior marriage, Sal has two adult children he hasn’t seen in 20
years. Sal and Sally assume they don’t need a will because
all their property will go to the surviving spouse.
Texas: at Sal’s death:

9 Sally keeps her ½ of the community estate
9 As to Sal’s ½ of the community:
o ½ to Sally
o ½ to his children
In summary:
¾ Don’t ever assume you know where intestacy will send
property
¾ If in doubt, the client needs a will
When does your client need a will? When there is
substantial property that is not passed by will substitutes.
Will Substitutes:
¾ JTWROS
¾ Retirement plans (e.g., 401(k), IRA, pension plan)
¾ POD accounts
¾ Life insurance
¾ Trusts
When does your client need a will? Minor children:
9 Minor children won’t have a guardian chosen by their
parents.
9 Property left to minor children won’t have
• a trust, or
• a trustee chosen by parents
9 Children will be treated equally in intestacy, but not
necessarily equitably.
• Children’s needs may be quite different.
1. Example. Special needs child.
When does your client need a will? When the value of the
estate is more than $1,000,000, including property passing by
will substitutes.
4,000,000
Estate Tax Lifetime Exempt Amount
3,500,000
3,000,000
E x c lu s io n A m o u n t
2,500,000
2,000,000
1,500,000
1,000,000
500,000
-
2004-2005 2006-2008 2009 2010 2011
Year of Death
• Summary:
– Client needs a will if:
• Minor children
• Substantial property will not pass by will substitute
• More than $1,000,000 in property, including will
substitutes
• If you’re in doubt, recommend that client do a will:
• A will is never a bad idea
• You are unlikely to be sued for recommending a will
– A non-estate planning specialist often can draft a

“sweetheart will,” but not a tax-planned will (a tax-planned
will is designed to reduce estate tax)
Example: Your clients, John and Mary Jones, own the following
property:
Type of
Description Value Property
Residence, titled JTWROS $200,000 CP

Bank accounts, titled JTWROS 10,000 CP
Mary’s 401(k) 40,000 CP
John’s IRA 20,000 CP
Bank account, POD Mary’s sister 1,000 SP, Mary
Life insurance on Mary’s life (death benefit shown) 500,000 CP
Land (inherited by John and titled in his name) 500,000 SP, John
John and Mary have two small children. Mary has asked if she and John
need wills. What is your advice?
9 Children?
9 Substantial property not passing by will substitute?
9 Estate tax?
Is a will ever not needed? Example:
Widow, 69, lives in a rented apartment. She has a $50,000 bank account, POD
to her only son, age 38. She has a small IRA and a $5,000 life insurance policy
payable to her son. Her only other assets are tangible personal property of
insignificant value, such as furniture. Her son has a key to the apartment, and
she knows of no one who would argue about who should get its contents. No will
needed.
• Will substitutes:
– POD Account
– Life insurance
– IRAs, 401(k)’s, pensions and other retirement accounts
– JTWROS
• And for purposes after death, there may be shortcuts without
probate:
– Cars
– Home in JTWROS
• 2/3 of people die intestate
• For planning purposes, if in doubt: client needs a will
Does your Client need a Living Trust?
9 Will substitute
Trust plus a Will
9 Advantages:
Avoids probate
Privacy
Miscellaneous other advantages
9 Disadvantage: Complexity of titling. No client ever does
it right. There will always be property left out of the trust
9 Does NOT avoid or reduce estate tax
9 Not used much in Texas because probate is relatively
efficient process in Texas
Estate Tax
) Graduated rate up to about 50% of the “Gross Estate.”
) What’s included in the Gross Estate?
– All property owned at death, real or personal, tangible or
intangible, wherever situated, plus:
– Property held immediately before death as:
• JTWROS
• Tenancy by the Entirety
• Certain life insurance proceeds
• Gift tax paid on gifts within 3 years before death.
• Accrued income as of date of death (rents, dividends, compensation,
other income earned but not paid).
• Any property transferred before death, if there was a retained
interest (right to use, right to receive income, right to determine who
will possess the property, right of reversion, right to revoke or change
disposition of the property.
• Any General Power of Appointment, or exercise or release (but not
lapse) of a general power within 3 years of death.
Estate Tax Exclusions
) Exclusions:
) Exclusion for property left to spouse (“marital deduction”): Unlimited.
) Exclusion for property left to others: currently $2,000,000 total per
decedent.
4,000,000
3,500,000
3,000,000
Exclu sio n A m o u n t
2,500,000
2,000,000
1,500,000
1,000,000
500,000
-
2004-2005 2006-2008 2009 2010 2011
Year of Death
Bypass Trust
$4 Million Estate
Husband Wife
$2 MM $2 MM
Children
Bypass Trust
$4 Million Estate
$2 MM
Husband Wife
$2 MM $2 MM
Children
Bypass Trust
$4 Million Estate
$2 MM
Husband Wife
$2 MM $2 MM
No Estate Tax:
- Lifetime Exclusion
$2,000,000
- Unlimited Marital
Deduction
Children
Bypass Trust
$4 Million Estate
Husband Wife
$2 MM $4 MM
Children
Bypass Trust
$4 Million Estate
Husband Wife
$2 MM $4 MM
$4,000,000
less $2,000,000 lifetime
exemption = $2,000,000
Children
Estate tax: $1,000,000
To children: $3,000,000
Bypass Trust
$4 Million Estate
Husband Wife
$2 MM $2 MM
$2 MM No Estate Tax:
- Lifetime Exclusion
$2,000,000
BUT: Surviving Spouse

Children
Can’t Access Money
Bypass Trust
$4 Million Estate
$2 MM
Husband Wife
$2 MM $2 MM
Bypass
Trust
No Estate Tax:
Lifetime Exclusion
$2,000,000
Children
Bypass Trust
$4 Million Estate
Wife
$2 MM $2 MM
Bypass Trust
Terms of Trust:
- For benefit of Wife
until her death
- At death, remainder
to children.
Children
Bypass Trust
$4 Million Estate
Wife
Bypass Trust
Terms of Trust:
until her death
$2 MM + Remainder of
- At death, remainder
appreciation Wife’s Estate to children.
Children
Estate tax: $0
QTIP Trust
Husband Wife
$10 MM $0 MM
Terms of Trust:
until her death
- At death, remainder to
QTIP Trust Husband’s children.
Children Children
QTIP Trust
Husband Wife
$10 MM $0 MM
Children Children

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Trustee Property (res)

“John Smith, Trustee” Property (res)

¾Trustee has power to do transactions (legal title)

Trustee Property (res)

9 Testamentary or inter vivos

Intent Required Elements for a

¾Trust property (Res)

Intent to create a trust

¾ Intent to create is required. Intent can be

“I devise my entire estate to my wife Gay. I

¾ Did this Testator intend to create a trust?

¾ Intent determined by court based on:

“I devise my entire estate in trust to my wife Gay.

¾ Precatory language will make a trust invalid,

“I devise my entire estate to my wife Gay. I ask, but do

¾ Other uses for precatory language: “precatory

Trustee Future Profits

Wife, Mom, Kids

Brainard made a declaration to wife and mother that

¾ Sometimes, not even a declaration is required….

¾ “Made declaration.” How about “made a

Trust must have an ascertainable beneficiary. Clark v.

Intent Required Elements for a

¾Trust property (Res)

Sally and family

Trust distributions provision of Sara’s Will:

“I give to my trustees…one-third (1/3) of the residue

“The beneficiary of the trust is Cappy for the duration

“The beneficiary of the trust is Cappy for the duration

Trustee still has duties of:

Trust distributions provision of Sara’s Will:

“I give to my trustees…one-third (1/3) of the residue

Sally and family

Client $ (For Education )

¾ Who pays trustee’s legal fees?

Effect of inflation on purchasing power.

1969-2005: Consumer Price Index averaged 4.8%/year

1969 Ford Mustang 2005 Ford Mustang

In 35 years, Ford Mustang price up 600%.

Consider “total return from income and appreciation of capital.”

Historical Performance of Asset Classes

Money Market Bonds Stocks

Past performance is not a guarantee of future performance.

Consider the effects of inflation.

Historical Performance of Asset Classes

Inflation Money Market Bonds Stocks

Past performance is not a guarantee of future performance.

Consider the effects of inflation.

Historical Performance of Asset Classes

Inflation Money Market Bonds Stocks

Past performance is not a guarantee of future performance.

Historical Performance of Asset Classes

Inflation Money Market Bonds Stocks

Past performance is not a guarantee of future performance.

Trust Co. 3 Rental Properties

Her Issue (great grandchildren)

Trust terminates 1991:

9 Court used 3.6% inflation rate: