Today’s class
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More on fiduciary duties of trustees
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Duty
Duty
Duty
Duty
Duty
of impartiality (continued)
to inform
to collect and protect trust property
to earmark trust property
not to mingle trust funds
Charitable trusts
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Charitable purpose requirement
1
Uniform Principal and Income Act:
Reallocation between income and
principal
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Trust 1: $100,000 in bonds with a 4 percent
interest rate. Each year, $4,000 in income is
generated, and principal remains at $100,000.
Trust 2: $100,000 in stock with an 8 percent
appreciation but no dividends. Each year, the
principal grows by $8,000 or more, but no income.
If the trustee splits the increase in value in Trust 2
between income and principal, both income and
principal beneficiaries are better off. (Income starts
at $4,000, then $4,160, etc.)
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Ind. Code § 30-2-14
2
Uniform Principal and Income Act
and the unitrust provisions
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The UPIA allows trustees to focus on total return without
worrying whether the return takes the form of income or
principal, but trustees still have to decide how much of the
return to allocate to “income” and how much to “principal.”
The unitrust provisions allow for a specified percentage of the
trust’s assets to be treated as “income”—it can be a fixed
percentage (4%), it can be tied to inflation, or it can be based
on prevailing interest rates (and usually applied to a rolling
three-year average of trust assets)
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When settlor chooses a unitrust, the settlor determines the percentage
When trustees convert a trust to a unitrust, as in Heller, the statute sets
the percentage (usually 3-5 percent) (3-5 percent in Indiana, with a
presumption in favor of 4 percent, § 30-2-15-15).
3
Heller, p. 731
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What were the facts?
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In his will, Jacob Heller created a trust (i.e., a testamentary
trust).
Jacob’s second wife, Bertha, would receive the total income
from the trust each year, with an additional amount if
needed to provide a minimum of $40,000 a year
The remainder of the trust would be divided among Jacob’s
four children from his first marriage
After 15 years, the annual income from the trust had
reached $190,000, and the trustees decided to elect New
York’s unitrust provision (which would reduce Bertha’s
4
annual income to $70,000)
In re Matter of Heller
In re Matter of
Heller
849 N.E.2d 262 (N.Y. 2007), p. 731
First
Wife
Jacob
Remainder
Alan
Herbert Suzanne
Bertha
First
Husband
Income
Faith
Sandra
5
Why was it a problem for the
trustees to elect unitrust
conversion?
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In Heller, the trustees who elected the unitrust conversion
also were remainder beneficiaries who would benefit from
the reduced allocation of estate returns as “income” (from
$190,000 to $70,000)
The court rejected a no-further-inquiry standard for this
structural conflict and instead required close scrutiny to
ensure good faith and fairness by trustees
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NY did not prohibit unitrust conversions by conflicted trustees even
though it did prohibit UPIA adjustments that would favor a trustee
The trustees were meeting their fiduciary obligations to the other
remainder beneficiaries
In Indiana, trustees who are beneficiaries need court
approval for a unitrust conversion (Ind. Code § 30-2-15-11)
6
Subrules relating to
trust property, pp. 736-738
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Duty to collect and protect trust property
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Trustee must collect and protect property without
unnecessary delay (i.e., as promptly as circumstances
permit). Precious jewelry or valuable art should be
secured against theft and insured against loss
Duty to earmark trust property
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Trustee must designate property as trust property rather
than the trustee’s own (i.e., in the name of trustee as
trustee)
7
Subrules relating to
trust property, pp. 736-738
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Duty not to mingle trust funds
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Trustees must keep trust funds in separate
accounts
But can make joint investments when pooling
allows for better investing, as long as careful
accounts are kept
Duty not to mingle is especially strict with respect
to the trustees’ personal funds
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Commingling is prohibited even if the trustees do not
use the trust funds for their own purposes
8
UTC §813: Duty to inform
and report, p. 738
(a) A trustee shall keep the qualified beneficiaries of the trust
reasonably informed about the administration of the trust and of
the material facts necessary for them to protect their interests. …
(b) A trustee:
(1) upon request of a beneficiary, shall promptly furnish…a
copy of the trust instrument;…
(3) … shall notify the qualified beneficiaries of the trust’s
existence … .
(c) A trustee shall send to the distributees…, and to other qualified or
nonqualified beneficiaries who request it, at least annually … a
report of the trust … .
(d) A beneficiary may waive the right to a … report or other
information … required to be furnished under this section. …
9
What were
the facts?
Fletcher v. Fletcher
Fletcher v. Fletcher
480 S.E.2d 488 (Va. 1997), p. 739
Elinor placed all of her assets
into a revocable, inter vivos
trust and then amended it to
provide for a number of
separate trusts upon her
death, including three for
James, Andrew and Emily
$50,000 to
provide “adequate
medical insurance
and medical care.”
$50,000 in such
amounts as trustees
deem advisable.
Elinor
J. North
Henry
James
Andrew
Emily
$50,000 in such
amounts as trustees
deem advisable.
10
Fletcher
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As a beneficiary of Elinor’s trusts, was son, James,
entitled to information only about his individual
trust or about all of the trusts?
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That is, should the court treat the arrangement as a
single trust or as many separate trusts?
According to the court, James should be treated as
a beneficiary of a single trust—there was a single
trust agreement with multiple trust provisions
rather than multiple trust agreements for the
different trusts
11
Fletcher
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But James didn’t really need to see the entire trust
agreement to monitor his own trust
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The court probably was sympathetic to James because
he was Elinor’s son
Even if James’ kinship motivated the court, the UTC
codified the Fletcher holding with respect to all
beneficiaries of a single trust agreement (§(b)(1))
Drafting lesson
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Elinor could have limited disclosure to James of the
terms of his individual trust in the trust agreement, or
she could have had multiple trust agreements
12
Charitable trusts v.
private trusts, p.751
Private Trust
Purpose
Modification
For the benefit of a
an ascertainable
beneficiary.
Charitable Trust
For the benefit of a
charitable purpose.
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Claflin doctrine
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Deviation
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Beneficiaries
Primary
Enforcement
Other
Cy pres doctrine
Deviation
State Attorney General
Exempt from RAP and
certain taxes.
13
Charitable purpose
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Once you include “other purposes that are
beneficial to the community,” it’s not
difficult to create a valid charitable trust
Nevertheless, if one isn’t careful, a court
will conclude that a trust designed to be
charitable fails as a private, benevolent
trust.
14
Shenandoah Valley
National Bank v. Taylor,
Shenandoah Valley
National Bank v. Taylor
63 S.E.2d 786 (Va. 1951), p. 752
What were the facts?
(1) On the last school day of each calendar year before
Easter my Trustee shall divide the net income into as
many equal parts as there are children in the first,
second and third grades of the John Kerr School … , and
shall pay one of such equal parts to each child in such
grades, to be used by such child in the furtherance of
his or her obtainment of an education.
Did the testator intend to create a charitable trust?
What was the purported charitable purpose?
15
Why did the Henry trust fail?
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The court drew a distinction between charitable
purposes and benevolent purposes and viewed the
Henry trust as a benevolent trust
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If we have a benevolent purpose, then Henry created a
private trust
While he’s free to create a private trust, it would have
to conform to the rule against perpetuities, and the
Henry trust did not (pages 753-754)
16
Why did the Henry trust fail?
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Why didn’t the trust survive as a charitable trust for
the advancement of education (pp. 754-755)?
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The distributions were to be made just before the Easter
and Christmas holidays when the minds of the children
“would be far removed from studies or other school
activities.” This indicates that there was “no educational
purpose . . . in the testator’s mind.”
The trustee was required to distribute the income to the
children and to all of the children without any control over
the use of the funds once the children received them.
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The admonition to use the money for the obtainment of education
“would be wholly impotent and of no avail”
17
Why did the Henry trust fail?
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Note the court’s rejection of the proposal to make
the payments to guardians of the children
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That wouldn’t have solved the problem of testator
intent—the goal of Henry was to bring to the children
“happiness on the two holidays” (the Henry candy trust)
(end of page 755)
18
Why did the Henry trust fail?
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What about the argument that giving all of the
children semi-annual payments would provide a
benefit to the community even without the
educational provision (page 756, top)?
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The trust’s payments served a benevolent purpose. For
financial enrichment to count as charitable, you need to
give it to a class of poor or other needy persons (e.g.,
orphans in the Philippines). As the court wrote (middle,
page 756)
19
Benevolent/charitable
distinction, p. 757
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It is not a charitable trust merely because it has a
large class of indefinite beneficiaries.
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A charitable trust can exist even though it will
benefit only one person.
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Business owners can set up charitable trusts for their
needy employees but not for all of their employees.
The costs-of-medical-school trust in Carlson . If Carlson
had named the actual recipient, then it would have been
a private trust. It was important that the trust would
serve medical needs.
The settlor does not have to determine the
charitable purpose(s) of the trust but can leave that
to the trustee.
20
Drafting lesson
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How might Henry have drafted his will to create a
valid charitable trust?
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The trustees were to distribute the income to needy
children
The trustees were to deposit the income into college
tuition accounts for the children
The trustees were to make payments so the children
could order books from the Scholastic book catalogue.
In a state without a rule against perpetuities, the
Henry trust would be acceptable as a private trust
with ascertainable beneficiaries
21
UTC definitions
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“Beneficiary” means a person that (A) has a present or
future beneficial interest in a trust, vested or contingent; or
(B) in a capacity other than that of trustee, holds a power of
appointment over trust property
“Qualified beneficiary” means a beneficiary who, on the date
the beneficiary’s qualification is determined:
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(A) is a distributee or permissible distributee of trust income or
principal;
(B) would be a distributee or permissible distributee of trust income
or principal if the interests of the distributees described in
subparagraph (A) terminated on that date without causing the trust
to terminate; or
(C) would be a distributee or permissible distributee of trust income
or principal if the trust terminated on that date.
22
Charitable Purposes, p.751
 Charitable trusts must have a charitable purpose.
Indeed, if a trust is designed to provide for particular
named people, it generally cannot be a charitable trust.
 Thus, for example, after the typhoon in the Philippines, you
could set up a charitable trust for children left as orphans
by the typhoon. But if you read about a family where the
parents were killed, you could not set up a charitable trust
for the five children.
 Note that it’s okay to have ascertainable beneficiaries in a
charitable trust (e.g., orphans in Philippines or families of
victims of the attack on the World Trade Center on 9/11).
23
Charitable Purposes, p.751
Charitable purposes include:
(a) the relief of poverty;
(b) the advancement of knowledge or education;
(c) the advancement of religion;
(d) the promotion of health;
(e) governmental or municipal purposes; and
(f) other purposes that are beneficial to the
community.
Restatement (Third) of Trusts §28 (2003)
24
Benevolent/charitable
distinction
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“ . . . if a large sum of money is given in
trust to apply the income each year in
paying a certain sum to every inhabitant of
a city, whether rich or poor, the trust is not
charitable, since although each inhabitant
may receive a benefit, the social interest of
the community as such is not thereby
promoted” (page 756)
25