TEXAS TRUST LAW: W. CASES AND MATERIALS

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TEXAS TRUST LAW:
CASES AND MATERIALS
Second Edition
GERRY
W. BEYER
Governor Preston E. Smith Regents Professor of Law
Texas Tech University School of Law
TABLE OF CONTENTS
Table a/Contents ............... ...................... ... .............. ... ..... ....... .. ....... .... .... .. ..... .... . vii
Table a/ Cases .. ...... ............ .... ..... ..... .... .................... ... .......... .. ...... ... ....... .. .. .. ........ xv
CHAPTER ONE: INTRODUCTION .............................................................. 1
A.
Basic Operation ............................................................................... 1
1.
2.
3.
4.
B.
Purposes and Uses of Trusts ........................................................... 3
I. Provides for and Protects Trust Beneficiaries .. ................. ...... 3
a. Minors ..... .... ... .... .... ...... .. .. ...... ........ .... .. .. ......... ..... .. .... .... .. 3
b. Individuals Who Lack Management Skills ..... .... .......... ... 3
c. Spendthrifts .. .. .. ...... .... ..... ........ ...... ......... ...... .. ....... ... ..... ... 3
2.
3.
4.
5.
6.
C.
Splitting of Ownership ...... ... .. ... .... ........ .. ..... .......... ................. I
a. Legal Interest ........... ................... ..... .. .... .... ..... .... ... ... .. .. .. . I
b. Equitable or Beneficial Interest ... .. ................. .......... .. ..... I
The Settlor ..... .... .. .... ... .. .... .. .. ... ........ .. ............. ......... .. .............. 2
Trust Property ....... .... .......... ................ ......... .. ......... ...... ... ...... .. 2
Basic Functioning of a Trust .... ........ ..... .... ....... .......... ... .. ........ 2
d. Persons Susceptible to Influence ...... ....... .... .... ........ .... .. .. 4
Provides Flexibility of Asset Distribution ...... ... .. ... ......... ..... ... 4
Protects Against Settlor's Incompetence .. .. ... ................. .. ... ... . 4
Allows Professional Management of Property ......... .... ........ ... 5
Avoids Probate ............ ... .. .. ..... ...... .. ...... ........ ....... ............ ... .... 5
Provides Tax Benefits .. .... ..... ....... ....... ..... .... ... ......... .. ...... ... ... . 5
Texas Trust Legislation .................................................................. 7
I.
2.
3.
4.
Before 1943 ...................... .... .......... .. .... ... ...... ... .......... ..... ... .....
Texas Trust Act. ....... ... ........... .... .......... ........ ... ..... ....... ..... .......
Texas Trust Code ...... ........ .. .... .......... ..... ...... ....... .... ....... .. .. .. ...
Other Trust Legislation ....... ......... ...... .... .... ... ....... .. ....... ... .. .....
7
7
7
8
CHAPTER Two: TRUST CREATION ....................................................... 11
A.
Trust Intent .................................................................................... 12
I.
2.
3.
4.
B.
Ascertaining the Settlor's Intent... ...... .. ...... .. ..... ..... .. ........ .....
Statute of Uses ....... ..... ....... ..... ...... .... ... .. ..... .... ... .. ....... .... ... .. ..
Split of Title and Merger ................. .......... ... .......... ......... ......
Distinguishing Trusts from Other Legal Relationships .... .....
12
21
22
23
Methods of Trust Creation ........................................................... 32
I.
Inter Vivos Trusts ....... ..................... ...... .... .. ........ ..... ..... ........ 32
2.
Testamentary Trusts ...... ... ....... .......... ... ... .... ...... ..... ............ ... 32
vii
Texas Wills and Estates
VIII
3.
Relevance of Consideration ..................... ..... ... ...... .. .... .......... 33
C.
Statute of Frauds ............................................................................ 33
D.
Rule Against Perpetuities ............................................................. .41
E.
Trust Purposes ............................................................................... 48
F.
The Settlor ...................................................................................... 60
C.
Trust Property ................................................................................ 69
H.
The
I.
2.
3.
4.
5.
6.
7.
I.
The
I.
2.
3.
4.
5.
6.
7.
8.
9.
10.
II.
J.
Charitable Trusts ......................................................................... 104
I.
Size of Charitable Class ...... ............ ...... .... ................... .. ...... 105
2.
Description of Charitable Class .. .. ........... .... ........................ 105
3.
Determination of Charitable Purpose ......... .. ........................ I06
4.
Relocation ............................................................................ 112
K.
Pour over Wills ............................................................................. 113
L.
Life 1nsurance Trusts .................................................................. 119
Trustee ..................................................................................... 75
Capacity ............................................................. ....... ...... ....... 75
Acceptance ............................... .............................................. 76
Bond ....... ................ ... .. .. .. ... ... ... ......... ... ........ ... .. .. .......... ....... .. 78
Multiple Trustees ..... ...... ....................... .... ... ......................... . 79
Resignation ............ .... ...... .... ..... ........ ............. .... .................. .. 79
Removal ................................................................................. 79
Successor Trustees .................. ... ..... .......... .. .. .. ...... .......... .... ... 79
Beneficiary .............................................................................. 80
Capacity .......................................... ... .................................... 81
Adequacy of Beneficiary Designation ................................... 81
Honorary Trusts ..... ... ......... ..... .. ..... .. .. .. ..... ... ............. ...... ... .... 82
Trusts for Pet Animals .............. ...... .............. .... ..................... 82
Incidental Beneficiaries .. ................ ............................... ......... 83
Disclaimer ....... ....... .............................. .............. .. ...... ...... ...... 83
Characterization of Distributions ........................................... 84
Effect of Divorce ........ ........... .... .. .............................. ............ 85
Transfers and Assignments ofBeneficiallnterests ................ 86
Duties of Beneficiaries to Each Other. ................................... 87
Availability of Beneficiary's Interest to Creditors ...... .. ......... 87
12. Discretionary Provisions ................ ... ..... ..... .. ...... ... .. .... .... ...... 91
13. Supp0l1 Provisions .............................. ..................... .............. 96
CHAPTER THREE: TRUST ADMINISTRATION ...................................... 121
A.
Overview ....................................................................................... 121
I.
Accept Trusteeship .................................. .. ... .. ...................... 121
Table of Contents
2.
3.
4.
5.
6.
7.
8.
9.
B.
2.
3.
Sources of Powers ...............................................................
a. Trust Instrument... .............. .. .. ......................................
b. Texas Trust Code .........................................................
c. Implied by Circumstances .. .............. .............. ............ ..
d. Court Order. .......... .... .. .................................... .. .. .........
Delegation of Duties ...........................................................
Multiple Trustees .................. .................................. .............
128
128
128
129
129
129
130
Standard of Care .................................................................. 130
To Whom Made .............. .............. .............. .. .... .............. .... 131
Duty of Loyalty ............................................................................ 131
I.
2. '
3.
4.
5.
6.
7.
F.
124
125
126
126
126
127
127
127
127
128
Trust Distributions ...................................................................... 130
I.
2.
E.
Background ...... ............................. ............. ............... ........ ..
Settlor's Ability to Alter Standard .......................................
Trust Protectors ...................... .. ...................... ............ .........
Trustees with Enhanced Skills ............................................
Compliance Review .................. ...... .... .......................... ......
Factors Trustee Must Consider .. .... .................................. ...
Diversification .....................................................................
Review of Trust Assets .............................. ...... ................ .. .
Loyalty to Beneficiaries .................. .......................... ...... ....
Impartiality ............................ .. ............................................
Trustee Powers ............................................................................ 128
I.
D.
121
122
122
122
122
123
123
123
124
124
Standard of Care & Investments ............................................... 124
I.
2.
3.
4.
5.
6.
7.
8.
9.
10.
C.
Post Bond .. ..... ...... .... .... ... ............ ........................................
Register Trust.. ........ ........ .. ..... .... ..... .. ...... .... .. ....... ....... ........
Possess and Safeguard Trust Property ...... .... ... .. ... ..... .........
a. Earmark Trust Property ............... ..... .. ......... ..... ... .... ....
b. Avoid Commingling ..... ...... ..... ........ ..... ..... ..... .............
Identity and Locate Beneficiaries ........... ... ..........................
Follow Settlor' s Instructions ......... .. ... ........ ..... .... ... ......... ... .
Act as Fiduciary .... ..... ..... ........ ...... .... .. .. .. .. ........ ... ..... .... ... ...
Support and Defend Trust ............ ......... ........ ... .......... ... ......
Certification ofTrust... ....... ... .. ... .. .. ... ... ....... ........ .............. ..
IX
Buying and Sell ing Trust Property ...................... .... ............
Borrowing Trust Property .......... ...... .... .......... ...... .............. .
Purchase of Common Investments .............. .............. ...... ....
Transfers Between Trusts ....................................................
Dealings With Beneficiaries ................................................
Self-Employment .................. .... ........................ .... ..............
Permitted Self-Dealing .................. .... ................ .. .... ............
132
132
133
133
134
134
135
Liability of Trustee to Third Parties .......................................... 140
I.
Contract Liability .... ........ ...... .. .... .......................... .............. 140
x
Texas Wills and Estates
2.
3.
Tort Liability ........................................................................ 141
Notice to Beneficiaries ......................................................... 142
G.
Allocation of Receipts and Expenses .......................................... 142
I. Basic Allocation Rules .......... ... ........... ..... .. .... ........... ........... 143
a. Capital Gains ................................................................ 143
b. Interest ... ........... ... ... ..... ........... .. ................ ........ ... ....... .. 143
c. Rent .............................................................................. 144
d. Eminent Domain Award ................ .... ........................ ... 144
e. Insurance Proceeds ........................................ ............... 144
f. Corporate Distributions ............ ............. ....................... 144
g. Business and Farm Receipts ... : ......... .............. .. .. .......... 144
h. Liquidating Assets .......... ........ .................. ................ .... 145
J.
Oil and Gas Receipts ...... .. ....... ................ ..................... 145
J. Timber .............. ........ .... ................... ........ .. ................... 145
k. Non-Income Earning Property ............................ .... ..... 146
2. Trustee's Adjustment Power .................... .................. ...... .. .. 146
3. Apportionment Upon Trust Creation, Termination,
Change in Beneficiary .......................... ...... ........ ...... .. ..... .. ... 147
4. A1I0cation of Expenses .................. .. .............. ........ .... .. ...... .. 148
5. Unitrust ................ ... ............................. ...... ... ............. ..... .. .. . 148
H.
Trustee's Duty to Inform Beneficiaries ...................................... 149
I.
Accou ntings .................................................................................. 150
J.
Trustee Com pensation ................................................................. 155
K.
Trust Modifications ..................................................................... 156
1.
By the Court .................. ...... ................. .. ....... ... ..... .... ........... I 56
a. Deviation ...................................................................... 156
b. Cy Pres ......................................................................... 156
2.
By the Parties ....................................................................... 165
a. The Settlor ....................... .......................... .... .... ........ .. . 165
b. The Trustee ... ............. .............. ............ .... .. .......... ......... 169
c. The Beneficiaries .......................................................... 170
d. The Beneficiaries Plus the Settlor ................................ 170
e. Family Settlements ....................................................... 176
L.
Trust Termination ....................................................................... 177
I.
Methods ............................................................................... 177
a. Express Terms of the Trust... ........................................ I77
b. Revocation by the Settlor ............................................. 177
c. Exhaustion of Trust Property ........................................ 178
d. Uneconomic ................ ........... ............. .. .... ..... ....... ........ 178
e. Court Order ................................................................... 178
f. Merger .. .... .... ................................... .......... ................... 178
Table of Contents
2.
Xl
Trustee ' s Duties Upon Trust Termination .. ..... ... ........ ... ...... 178
CHAPTER FOUR: TRUST ENFORCEMENT ............................................ 181
A.
Procedural Matters ..................................................................... 181
1.
Standing ..... ........ ........ .. ... .... ... ........ ..... ....... ... .. ............. ....... 181
2.
Parties ... ........ ......... ... .. .. .. ..... ... ..... .. .... .. .... ...... ... ............. ... ... 182
3.
Jurisdiction ... ..... ... ........... ............. ... .... ........ ... ...... ......... ...... 183
4.
Venue .. ... ............. ... .... .... .. .... .. ...... ..... ... ........ .. ... .... ...... ........ 183
5.
Rules of Procedure ........................ ...... .. .. ........ ............. ..... .. 184
6.
Virtual Representation ..... .. .......... .. .. .. .. ... .... ...... .. .............. .. . 184
7. Guardians and Attorneys ad Litem ...... ...... .. .. .... .. ........ .. ...... 184
B.
Remedies Against the Trustee .................................................... 184
1.
Money Damages .. .... .. ............ .. ... ............ ........ .... ......... .. ...... 185
a. Lost Value .... .. .... .... .. .............. ........... ... ... ... .. ....... ......... 185
b. Profit Made by Trustee .... ............ ........... .. .... .. ..... ..... ... 185
c. Lost Profits ........................... .... ...... ....... .. .. .......... .. ...... . 185
d. Punitive Damages .... .... .... .. .. ...... .. .. .... .. ....... .. ... .... ........ 185
2.
Removal of Trustee .... .. .. ................ .. .. .... .. ......... .. ... ... .... .. .. .. 186
3.
Decree to Carry Out the Trust.. .. .. .... .. ................................. 191
4.
Injunction .... .... ............................... .. .. ...... .... .. ... ....... .. ...... ... 191
5.
Receivership ............................ .. .. ... .... ........................ ....... .. 191
6.
Require or Increase Bond .. .... ... ............... .. .......................... 192
7.
Declaratory Judgment ...... ........... .. ...... .... .. ... .. .. .. .. ........... .. .. 192
8.
Award of Attorney Fees Against Trustee ... .. ............. .. ..... ... 193
9. Criminal Sanctions .. .. .. .... .. ............... .. .. ........... .. ...... .. ........ .. 193
10. Liability of Successor Trustee for Breach by
Predecessor Trustee ....... .... ... .. ... ............... ........ ... ... .......... ... 193
C.
Remedies Against the Beneficiary.............................................. 193
D.
Remedies Involving Trust Property ..........................................
1.
Tracing .... .. .. ............ .. .......... ... .. .......... .. ...............................
2.
Subrogation .. .. .. ..... ........ .. ..... ........ .. .. ...... .. ........... .. ..... .........
3.
Marshalling .. .. ................. ..... ........ .... .. ........ .. .. .... ... .. .. ... .... ...
4.
Bona Fide Purchasers ........... ................ .... .. ................. ..... ...
E.
Causes of Action Against Third Parties .................................... 197
F.
Enforcement of Charitable Trusts ............................................. 197
1.
Settlor .. ...... ............ .. ..... .. .. .. .. ......... ......... ......... ................. ... 197
2. Texas Attorney General .... ........ .. ..... .. .. .... .. .. ....................... 203
G.
Barring of Remedies .................................................................... 203
1. Settlor' s Approval in Trust Instrument .... .. .... ..................... 203
a. Trust Purposes .. .. .. .. .. .. ................ .. .. .. ...... .. .... ..... .. ........ 203
b. Trustee Exculpation .................... .... .. .. .... ... .. .. .... .... .... .. 204
194
194
194
195
195
Texas Wills and Estates
XII
2.
3.
4.
5.
c. Statute of Limitations ........ ........................ .............. .. ... 204
d. Trustee's Duty to Account for Irrevocable Trusts ........ 204
e. Trustee' s Duty of Good Faith ........ .... .... .. ........ .. ........... 204
f. Court' s Power ........ ....... ........ ....... .... ......... .... ................ 204
g. Forfeiture Clauses ....... .................... .. ... .... .... ... .. .... .. ...... 205
h. Trustee' s Duty to Inform Beneficiaries .. .. .. .. .. .. ...... ...... 205
Release by Beneficiaries .. .. .... ........................ ...................... 205
Court Decree .. ....... ............ ... ....... ... ... ...... ...... ........... ............ 205
Statute of Limitations ..... ..... .......... ...... .. ... ...... .. ....... .. .. ... .. .... 206
Laches ... ............ ........ ... .... .. ...... .. ...... .. ...... ... ... .. ..... .. ........... ..213
CHAPTER FIVE: OTHER "TRUSTS" ...................................................... 215
A.
Trust Depository Accounts .......................................................... 215
1. Definition ...... .. .. .. ........ ........ .. ...... .. ........ .................. .. ...... .. .. .215
2. Historical Note ...... .... .. ..... .. ........ ......................................... .215
3. Effect During Lifetime .......... .............. .. .. .. .. .. .... .......... .. ....... 216
a. Ownership ..... ..... .... .. ..,..... ... .. ...... .......... ...... ... .. .. .. .... .... .216
b. Right to Withdraw .............. .. .......... .. ............ .. .. ............ 216
4.
Effect After Death .. .. ... ................ ............ .. ............ ...... .. ...... .217
a. Ownership ......... ... ................ .. ... ...... ....... ... .. .... ..... ....... . 217
b. Right to Withdraw .................. .... ...... ...... ...... .. .... .. ........ 217
5. Benefits .... .......... ..... .. .. .. .. ............ .. .... .. .. .. .. ........ ...... .. ...... .... . 217
a. Probate Avoidance ............ .... .. .... ...... .. ................ .. .. ...... 217
b. Inexpensive Will Substitute .. .. .... .. ...... .. ........................ 217
c. Depositor Gives Up No Control ........ ...... .. ...... .. ........... 217
d. Small Gifts in Complex Estate .. .... .... .... ........ .. ............. 218
6. Disadvantages .. ....... ...... .... ... .... ...... ........ .. ..... .. ....... ........ ...... 218
a. Lack of Professional Management .. .. ............ .. .. ........... 218
b. No Tax Benefits .... ............ .. .. .... .... ........ .... .. ...... .. .. ...... .. 218
c. Client Confusion ........ ............ .. .......... .. .. .... .. ...... .... .... .. .218
7. Definition of "Account" ..... ..... ....... ...... .. ........ .......... .... ..... .. .218
8. Definition of "Financial Institution" .. .. .... .. ........ .. .. .. ............ 219
9. Effect of Divorce ...... .... .. .... ...... .... .............. .. .. .. .. ................. 219
10. Conflicting Disposition by Will ............ .. .. .......... ............ .....219
11. Survival ...... .. ..... .. ...... .......................... .... .... .. .... .. ........ ... ......220
12. Effect of Depositor's Incapacity .. .. .................... .......... .... .... 220
13 . Rights of a Living Party ' s Creditors .......... .................... .... .. 220
14. Rights of Deceased Party's Creditors .... .. .. .. .... .. .... ........ ...... 220
a. General Creditors .... .. .... ............ .. .. ...... .. ...... .. .... ..... .... .. .220
b. Secured Creditors .............. .................................... .... .. .221
c. The Financiallnstitution ............ .. ........................ ......... 221
15 . "Stopping" Payment from a Trust Account ........ ........... ...... 222
16. "Old" Accounts ...... .... ... .. ...... ... .. .... ... ... .... ..... ...... ... ....... .. ..... 222
Table of Contents
XIII
B.
Resulting Trusts .......................................................................... 223
1. Failure of Express Trust to Dispose of All Trust
Property ..................................................................... .. .. ... ... 223
2.
Failure of Express Trust .... .. ........................ ........................ 224
3.
Purchase-Money Resulting Trust.. .. ........ ...... ............ .. ........ 227
C.
Constructive Trusts ..................................................................... 229
1.
Fraudulent Conduct.. ...... .... .... ...... .............. ...................... .. . 231
2.
Abuse of Confidential Relationship ............ ........ .......... .... .. 234
3.
Unperformed Promises Made in Contemplation of
Death .. ........ ... ........ .. ... ... ...... .. ......... .... .... .... .... .. ...... .... ........ . 235
ApPENDIX: SAMPLE WILL WITH TESTAMENTARY TRUST FORM ..... 237
Index .......................................... .. .............. .. ...................... .... ...... ....................... 261
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