Ny Bar Review - Trusts Lecture Notes

NEW YORK TRUSTS I.

OVERVIEW a. Material Tested i. Express Trusts 1. Private 2. Charitable ii. Implied or Imposed trusts (judicial remedies, not really trusts) 1. Constructive trusts 2. Resulting Trusts iii. Trust-Like Mechanisms 1. Joint Bank Accounts with rights of Survivorship 2. Totten Trusts, and 3. Custodial gifts to minors b. Trust law applies to private and charitable trusts, but not to constructive trusts, resulting trusts, Joint bank accounts, totten trusts, and custodial gifts to minors c. A constructive trust is just a name for an equitable remedy that the court uses to prevent unjust enrichment. d. A resulting trusts is a remedy the court uses when an attempt to create an express trust fails.

Express Trust (Private and Charitable trusts) a. Division of legal and equitable title. b. The trustee holds legal title to the property. The trustee has all the responsibilities and (none of the fun) of ownership. The trustee has fiduciary duties. c. The beneficiaries have equitable title. The beneficiary has all of the fun (and none of the responsibility) of ownership. II. Reasons to create a trust: a. Benefit successive generations b. Beneficiary cannot manage the assets (minor child) c. Helps avoid probate (avoid public probate process) d. Facilitates tax planning. III. One can create an express trust during one’s life, or at one’s death. a. An intervivos trust (also called a “living” or “lifetime” trusts) is a trust created by a written instrument executed during the settlor’s life. b. A testamentary trust is created by a provision in the testator’s valid will. IV. Intervivos trust is a non-court trust. No court is involved in the creation or administration of an inter vivos trust, unless the trustee or a beneficiary brings an action for construction or enforcement. - By contrast, the surrogate’s court oversees the creation of a testamentary trust. This means that the trustee has to account to the court periodically. (It adds a hassle to the administration. V. Trust requisites: (elements of an express trust) a. The settlor b. The trustee c. The res (trust property), and d. The beneficiaries I.

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Settlor: a. Also called “creator”, “trustor”, or where the trust is testamentary “testator.” b. The Settlor must be 18 years old and have capacity to transfer the title to the trust. Trustee a. The trustee holds legal title to the trust property and has fiduciary duties to hold trust assets for benefit of beneficiaries b. No trust will fail for lack of a trustee. If the settlor fails to appoint a trustee or if the trustee dies or resigns and no alternate trustee is specified in the trust document, the court will appoint a trustee. c. By statue the following people cannot serve as a testamentary trustee: 1. A minor 2. A convicted felon 3. Or a person who is incompetent because of drunkenness, dishonesty, improvidence or want of understanding. d. A non-resident alien, unless she is related to the testator and a NY resident serves as co-trustee. e. No such restrictions on trustees for intervivos trusts. Because a lifetime trust is a “non-court trust” (which means that no court involved in the trust creation), the settlor may appoint anyone as trustee. (No statutory restriction). RES – also referred to as: a. Property b. Corpus, or c. Principal 1) Trust property must be clearly identifiable. The court must be able to identify the specific property that is subject to the trust by referring to facts as they existed at the time that the trust was created. (The court has to be able to identify the trust property). 2) An expectancy cannot be the subject of a trust. A beneficiary in a will only has a mere expectancy. A person cannot set up a trust on the hopes of getting property. Certain Unfunded trusts are valid. Notwithstanding the res requirement, a NY statute establishes that an unfunded trust (standby trust) is valid if the trust’s purpose is to serve as a receptacle for proceeds from: a. Certain non-probate assets, i.e., life insurance policy, retirement accounts, or Payable on death contracts (P.O.D.) – these are currently existing property interests. b. In addition, an unfunded trust is valid even if the trust’s only function is to receive property from settlor’s will. (This means that in the will, the settlor can have a pour over provision to pour assets into the trust). BENEFICIARIES a. Generally: 1) The beneficiaries are the equitable owners of the trust property. They may sue the trustee for breach of fiduciary duty and to enforce the trust’s terms. 2) **The Merger Doctrine – historically, it was held that if the sole trustee and the sole beneficiary were the same person, legal and

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equitable title merged, and the trust would fail (because a person cannot owe fiduciary duties to herself). 1. A 1997 statute abrogated the merger doctrine, directing that a trust is valid even if the sole trustee is the sole beneficiary, provided that there is a least one other trust beneficiary. Even a contingent remainder works. This is all you need to have a valid trust. I.e., To A until 40 years old and then to her then living children.” 2. The beneficiary requirement for private trusts: trust beneficiaries must be specific and identifiable or the trust will fail. a. If a testamentary trust fails for lack of identifiable beneficiaries, then the trustee holds the assets in a resulting trust for the benefit of either: i. The testator’s residuary legatees ii. Or if the trust was a residuary trust, for the testator’s heirs. b. Exception: i. Courts will uphold designation to “relatives,” kind or family. To enforce such a provision, courts will refer to the intestacy statute to determine who the relatives are. 3. The beneficiary requirement for charitable trusts: a. Unlike private trusts, charitable trust may not benefit a specific person or group of people, instead the gift must be for a segment of the public and the trust has to have a charitable purpose. b. Charitable purposes: I.e., medical research, religion, etc. c. Charitable trusts are not subject to the rule against perpetuities. 4. The Tilden Act states that a trust is valid even if the testator fails to name a specific charity. In this case, the court will hold a hearing and name a charitable recipient that most closely seems to carry out the charitable purpose. 5. The attorney general enforces the beneficiary’s interest in a charitable trust. In a resent NY case, the court held that the settlor of the charitable trust may also sue to enforce the trust’s terms. 3) No honorary trusts: Rule: A private express trust cannot benefit nonhumans. You cannot create a trust for the upkeep of rose garden or a car. Exceptions: 1. By recent statute trust to benefit pets are okay, but they can only endure for 21 years. Such trusts re enforced by an individual either designated by the testator or appointed by the court. 2. Trusts are allowed for the upkeep of a grave or burial place. Such trusts are classified as “charitable trusts,” and are therefore valid and enforceable. Trust creation: a. A writing (in NY you must have a writing) b. Intent, and 3

c. Delivery of the trust property to the trustee. XII. Creation of Testamentary Trusts: a. Writing 1) You need to have a valid will. (The will that creates the trust must be valid –must meet will formalities) b. Intent to create a trust. T’s words must reveal intent to impose a legally enforceable obligation on the trustee. 1) Words like “hope” desire, suggestion are not clear enough to create a legally enforceable obligation. “Indefinite terms” No trust when you have precatory language. c. Delivery: After will is admitted to probate, and all disputes, if any, are resolved, courts will approve delivery of trust assets to trustee. XIII. Creation of Inter Vivos trusts: a. Writing: A New York statute directs that an inter vivos trust must be created by a writing (declaration or deed) that is signed by the settlor and at least one trustee, (unless the settlor is the only trustee) and either 1) acknowledged before a notary public, or two witnesses, who must also affix their signatures. b. Intent to create inter vivos trusts: NO ISSUE. Because a writing is now required, the intent requirement is less relevant for living trusts. If the settlor has signed a written deed or declaration of trust, and has executed it in compliance with the formal requirements imposed by NY Statute, the question of intent is pretty clear. c. Delivery: 1) To create a valid inter vivos trust, the settlor must transfer title of trust property to the trustee. Or if it is a stand by trust, the settlor has to make the beneficiary designation to that asset that is going to pour over to the trust. You have to say “X as trustee, in the life insurance policy.” XIV. Pour Over Wills a. A pour over will is one that distributes some or all of testator’s assets to an inter vivos trust, usually done by a provision in the residuary clause. b. Some advantages of pour-over wills are: 1) Avoids having to have the court involved in the trust administration. 2) Avoids two sets of trustee’s commissions and other complications that would be created if testator had both an inter vivos trust and a testamentary trust. c. Pour-over gift to an inter vivos trust is valid only if: the settlor executes the trust document prior to or concurrently with the will. d. The settlor may amend the trust document after the will’s execution. e. The receptacle trust may be unfunded. XV. LIFE INSURANCE AND TRUSTS a. Trustees of both inter vivos and testamentary trusts can be designated as beneficiaries of life insurance policies. b. If the trustee of an inter vivos trust is the beneficiary, the trust document must be executed before the beneficiary designation is made on the life insurance policy. c. The inter vivos trust can be revocable and unfunded d. This rule also applies to P.O.D accounts and retirement plans.

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XVI. SPENDTHRIFT TRUSTS a. The Statutory Spendthrift Rule 1) A spendthrift clause prohibits the attachment or assignment of the beneficiary’s interest in the trust. (Meaning, that creditors cannot attach your interest in the trust to satisfy debts). In most states, the settlor must insert a spendthrift clause to create a spendthrift trust. But a NY Statute directs that, all income interest in trust have automatic spendthrift protection. b. Exceptions: Limited Creditor’s rights: an income beneficiary’s creditors can reach the income only for the listed exceptions: 1) A creditor who provides necessities can attach the interest in the trust. (Food, clothing, shelter, medical services, etc.) 2) Cannot default on child support and alimony. (public policy) 3) IRS – Federal tax liens Any other creditors (are left with 4 & 5 as remedies): 4) Excess income beyond that which the beneficiary reasonably needs for support and education. 1. Reasonable need is a question of fact. The court may take account of the beneficiary’s station in life. Meaning the more luxurious your life is the more protection you get from the creditors. 2. Creditors can attach other sources of income. 3. This is a last resort. a. The creditor must show she has exhausted all other remedies before she may proceed under this section. There is nothing left for them to try to attach. 5) 10% levy. Creditor can take 10% of the income, and then proceed to satisfy rest of judgment under the “excess income” provision. 1. If there is more than one creditor – they have to share the 10% of the income. This is a cap. c. Remainder Interests are not protected. The statute does not extend automatic spendthrift protection to remainderman. 1) A creditor can attach against the remainderman, but they cannot levy, until the interest becomes possessory. 2) NOTE: You can also draft a spendthrift clause to protect the remainderman. However, the protection is not automatic. d. No Self-Settled Spendthrift trusts allowed 1) No self-settled spendthrift trusts. (You cannot set up a trust to protect yourself from creditors). 2) If the trust is revocable, the creditors can attach all of the trust they need because testator kept strings over the trust. XVII. RESTRICTIOSN AND LIMITATIOSN ON TRUSTS a. Trust must be for a lawful purpose b. Trust must have a lawful purpose. A trust will fail if its enforcement involves commission of a crime or tort, or when its terms are against public policy. When they test in this area, it is on conditions that are against public policy. c. Four Unlawful conditions: 5

1) Conditions that encourage divorce. 2) Conditions that are a total restraint on marriage. 1. A court conditioning a gift on remarriage is okay (if the person was married before). Partial restrains on marriage are okay. 3) Conditions that discourage procreation 4) A provision that requires the destruction of property. d. When the condition is unlawful, the trust beneficiary takes the property outright, without any conditions. 2. A Private Express trust must not violate the Rule against Perpetuities (RAP) *** a. Charitable Trusts are not subject to the RAP. i. The RAP does not apply to remainders that are indefensibly vested or vested subject of complete defeasance. ii. The RAP does apply to remainders that are vested subject to open (subject to partial divestment), contingent, or executory. 1. In NY, (see different name) b. The RAP - “No estate in property shall be valid unless, it will vest or fail to vest within 21 years of the death of a life in being at the creation of the interest.” c. New York statutory law allows courts to undertake certain limited reforms of wills and trust instruments to save conveyances that violate the RAP. i. The “unborn widow” problem. The term spouse is presumed to refer to someone who was alive at the creation of the interest. 1. Most of the time, this NY statute saves the gift. 2. TIP: look for a remainder, somewhere in the conveyance there will be a “spouse” or “widow”. Say, under NY law a reference to a widow of spouse will be presumed to have been alive at the time of the creation of the interest. HINT: the widow or spouse is going to be the validating life (because we presume that she was alive at the time of the creation). Will it vest at the widow’s death? ii. Reduction of age contingency to 21: where an estate would be invalid because vesting or duration depends on any person attaining or failing to attain an age in excess of twenty one years, the court will reduce the age contingency to 21. iii. Fertile Octogenarian problem. – The statute presumes that women are infertile after age 55. In addition, disregard the possibility that the woman could adopt a child, and the court can take into account any evidence regarding the actual fertility of a woman. 1. TIP: to figure out that the issue, the bar examiners have to tell you the age of the woman. Watch out for age. 3. Private express trust provisions must not violate the NY suspension Rule a. The Rule: A present or future interest shall be void if it suspends the absolute power of alienation for a period that exceeds a life in being plus 21 years. b. The power of alienation is suspended when there are no persons in being who can join together to convey an absolute interest in the property. c. Key: These questions on the bar tend to be related to the Rule against perpetuities.

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i. Example: “to A and her heirs for so long as no liquor is sold or consumed on the premises; if liquor is ever sold or consumed on the premises, title shall revert to B and his heirs.” 1. Identify the interest: Fee simple subject to executory limitation. 2. Does the conveyance satisfy the suspension rule? Yes, it satisfies it because the day after the conveyance, A is in possession of a fee simple and B has the interest, they can get together and sell in fee simple absolute. 3. Is the conveyance valid under the RAP? No, because A and A’s heirs can be on the property for 300 years before a violation of the condition. It will not vest within life in being plus 21 years. d. Because of the NY statutory spendthrift rule, the suspension rule will be violated whenever a life interest is created in an unborn person or in a class that may contain unborn persons. (This means that the interest cannot be alienated because the present estate holders cannot get together with the unborn person to sell in fee simple absolute). 4. Any powers of appointment created in the trust must satisfy the RAP a. The power of appointment must be valid when it is created and must be validly exercised. i. To be valid a general testamentary power or a special power must be certain to be exercised if at all within life-in-being plus 21 years. ii. Key: if such power of appointment is given to someone who is alive when the power is created the power is valid. However, if the power is given to an unborn person it is invalid, because that unborn person could conceivably exercise the power more than 21 years after the deaths of all lives-in-being. iii. The power of appointment must be validly exercised. 1. To determine whether the exercise of a general testamentary power of appointment or any special power of appointment is valid; read the appointment as though it were part of the instrument that created the power (“relation back doctrine”). b. Second Look Doctrine: in determining the validity of an exercise of a power of appointment, one is allowed to take into account facts existing at the time the power is exercised. i. I.e., Supposed instead that Judy is survived by three children, each older than age nine. In this case, appointment is valid because at her death, we know that all her children will reach 30 (or die) within 21 years of Judy’s death. (The court will look at the current situation – where the kids are already 9 years old (9+21=30). 5. Trust Modification and Termination a. Judicial modification of private trusts for changed circumstances. i. Where a trust’s primary purpose is frustrated by a specific directive the trust will be modified. 1. I.e., a trust was modified because the settlor’s primary intent was to provide for his family, and his secondary intent to publish the newspaper frustrated his primary purpose. (The court struck down the provision). 7

ii. Invasion of Principal for Income beneficiary 1. As a general matter, the trust document ordinarily directs the extent to which the trustee can invade principal for beneficiary’s support. But what happens when the settlor, assuming that the income will be sufficient for beneficiary’s support, does not give trustee power to invade principal? a. At common law, the life beneficiary was out of luck. In NY, the court may exercise discretion to allow a principal distribution to the income beneficiary, if i. The trust income is insufficient for the beneficiary support and education AND ii. Distribution of principle is necessary to accomplish the trust’s objectives. b. In other words, the court must be satisfied that a principal distribution would effectuate the settlor’s intent. iii. Judicial modification of charitable trusts: cy pres 1. Charitable trusts are subject t the equitable doctrine of cy pres. (as near as possible). If circumstances have so changed since the execution of the trust instrument that the trust’s purpose is rendered impracticable or impossible, the court may direct the benefit in a manner that will most effectively accomplish the settlor’s general charitable intent. 6. Termination of Trust by settlor a. Revocable living trust i. Settlor may revoke at any time, if the settlor expressly reserves the right to revoke AND the settlor must follow the trust’s directive for revocation (must be done as stated in the trust). b. Irrevocable living trust: i. To revoke, the settlor and all the beneficiaries must consent to revoke the trust. ii. Settlor need not obtain consent of unborn or unascertainable beneficiaries But iii. If a living beneficiary is incompetent or a minor, the trust cannot be revoked because by law minors and incompetents cannot give consent. c. Doctrine of worthier title i. The doctrine of worthier title states that a settlor cannot create a remainder on his heirs. (If Settlor did so, it would fail and he would have a reversion. ii. New York has abolished the doctrine of worthier title. Now, settlor can create a remainder in his heirs. 1. But, this creates a problem when the settlor seeks to terminate an irrevocable trust. S cannot obtain the consent of the remainderman because S’s heirs cannot be determined until S’s death. 2. Problem solved by NY statute- A New York statute provides that, for purposes of the rule that authorizes the settlor to terminate the trust with the consent of all beneficiaries, a disposition in favor

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of heirs, next of kin, etc. creates no beneficial interest in the heirs. Thus, S need only consent of the life tenant to terminate the trust. 3. However, if settlor does not attempt to terminate, settlor’s heirs take the remainder at settlor’s death. d. Revocation of Inter vivos trusts - Any amendment or revocation must be in writing, signed by the testator, and acknowledged, or witnesses in a manner required for creation of trusts, (unless deed otherwise provides). i. Notice must be delivered to the trustee in reasonable time, but failure to notify the trustee will not affect the validity of the revocation. ii. Settlor can revoke a revocable living will trust by a specific reference in her will. e. Termination of testamentary trusts i. Claflin doctrine: The court may terminate a testamentary trust only if: 1. All the beneficiaries consent AND 2. Termination will not frustrate a material purpose of the trust. ii. Difficulty, in NY, all income interests in trust have automatic spendthrift protection. So, courts cannot terminate a testamentary trust upon application by beneficiaries (even if they all agree), because doing so would frustrate a material purpose of the trust to keep the income beneficiaries from alienating their interest. (Only where the testator says “no spendthrift clause will the court be allowed to terminate the trust). II.

TRUST ADMINISTRATION: TRUSTEE POWERS, PROHIBITIONS AND DUTIES a. Powers i. New York has the fiduciary powers act, which lists very broad powers that can be administered by a trustee or by an executor without court order, except to the extent that the trust document limits or enlarges such powers. 1. The list of powers is too extensive to justify intensive study. The key: if the owner of a fee simple can do it. The trustee can do it. For example, the trustee can sell, mortgage, and lease trust property. (Just as an owner of a fee simple could). ii. Prohibitions: 1. Trustee cannot do it if the act falls into one of the following two categories: a. If the act is expressly prohibited by the fiduciary powers act b. If it is an act of commingling funds. iii. The New York Fiduciary Powers Act does not grant the following powers: 1. The trustee cannot perform the following acts, unless such a power is expressly granted by the trust instrument:

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i. Continue a business: trustee will be personally liable on all obligations incurred if he does so ii. Destroy real property iii. Employ agents or delegate duties iv. Make extraordinary repairs or improvements v. Keep funds un-invested vi. Advance funds to a beneficiary. vii. ENGAGE IN SELF-DEALING (See duty of loyalty) 2. Trustee cannot co-mingle trust assets with trustee’s assets a. The trustee must keep personal assets separate from trust assets. b. If trustee commingles trust property with her own, the trustee always looses. i. If some property is lost or destroyed, presumption that lost or destroyed property was the trustee’s property and that the property still on hand belongs to the trust. ii. If the trustee makes withdrawals, court will presume that the amount withdrawn was the trustee’s personal property, and that whatever remains is trust property. iii. If the trustee withdrew funds to purchase assets or investments, and: if the assets or investments have increased in value, the beneficiary can claim that the trust assets were used to purchase the investments. iv. If the investments have decreased in value, the court will presume that the trustee purchased those assets with personal funds. 2. DUTIES (1) Duty of loyalty a. Trustee owes an undivided duty of loyalty to the trust and its beneficiaries. b. That means: that the trust cannot transact business with the rust on her personal capacity. i. The trustee cannot buy or sell assets to itself; cannot borrow trust funds, no matter how fair the transaction; loan funds to the trust; any interest paid has to be restored, any security given is invalid; profit from serving as trustee, except for legit compensation, and; engage in indirect self-dealing (transactions between trust and trustee’s family members). (2) Allocations Duties: How should a trustee allocate trust assets between the income beneficiaries and the remaindermen –

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(a) New York recently adopted the Uniform Principal and Income Act, which applies to all New York Trust and estates unless the document specifies otherwise. (i) The Act sets out detailed allocation rules regarding how the trustee is to allocate assets between income and principal. The rules generally follow traditional accounting rules. The trustee is required to distribute trust income (such as interest, rental income, and cash dividends) to the income beneficiary, and to credit increases in principal (such as capital gains and profits from the sale of assets) to the corpus, for eventual distribution to the remainderman. (ii) But, the statute gives the trustee an adjustment power which is the right to depart from traditional accounting rules if relocation is necessary to carry out trust purposes. (b) Allocation Rules (i) Money from an entity (such as a corporation, partnership or real estate investment trust) is credited to income UNLESS 1. the money represents a capital gain for income tax purposes, or 2. is received in partial or total liquidation of the entity. (ii) All property other than money that is received from an entity (stock, dividends, and stock splits) is attributed to principal. (iii) Insurance policies: proceeds from a life insurance policy or other contract that names the trustee as beneficiary are allocated to principal. (iv) Mineral, oil and gas leases: ten percent rule 1. “nominal” delay rental paid pursuant to the lease is income 2. Any other distributions are allocated 10% to income, and 90% to principal. (v) Patents, Copyrights and book royalties: ten percent rule applies. 1. The payor determines the characterization of periodic receipts from a deferred compensation plan. If the payor fails to characterize the payment 10% is income, and 90% is principal. (vi) Allocation of Expenses: 1. expenses charged to income: 1/3 of expenses for investment advisory or custodial services to the trustee; a. The entire cost of ordinary expenses incurred in the management and preservation of trust property (repair, taxes, insurance premiums); insurance premiums covering the loss of a principal asset. 2. Expenses charged to principal: 2/3 of expenses for investment advisory or custodial services to the trustee; trustee’s compensation; payments on the principal of trust debt, estate taxes and expenses, and disbursements related to environmental matters. 11

(c) The trustee’s adjustment power (i) The trustee may depart from the accounting rules and reallocate trust funds between income and principal if necessary to effectuate trust purposes. (ii) In determining whether to reallocate, the trustee should consider the following factors: 1. Need for liquidity and regular income and preservation and appreciation of capital. 2. Intent of the settlor 3. Trust assets’ nature and characteristics 4. Purpose, nature and expected duration of the trust 5. Circumstances of the beneficiaries. a. The trustee has a duty of fairness to all beneficiaries, except to the extent that the trust document states a preference. b. The trustee may not exercise her adjustment power if the result would be adverse tax consequences. b) Remedies for Trustee’s breach of trust 1. Upon an improper action by the trustee (such as breach of the duty of loyalty, or improper investing), the beneficiaries may either (1) Ratify the transaction and capture the profit, or (2) Hold the trustee liable in a surcharge action (a) The measure of damages is the full amount of damages that results from the act. 2. No further inquiry rule. If the beneficiaries sue the trustee for breach of duty of loyalty, the only thing the beneficiaries have to show is that the trustee engaged in self-dealing. This showing triggers the “no further inquiry rule.” The only issue left is damages. 3. Statute of limitations for actions against trustee: the statute of limitations does not begin to run against a trustee unless and until, (1) the trustee repudiates by denying the existence of the trust with respect to the particular assets, or (2) the trustee files an accounting that reveals the breach of duty or (3) The trustee seizes to act as a trustee. (e.g., the trustee resigns or dies or the trust terminates in accordance with its terms). RESULTING AND CONSTRUCTIVE TRUSTS (Judicial remedies) 1. Constructive trusts a. Equitable remedy used to prevent unjust enrichment in cases involving wrongful conduct or abuse of a confidential relationship. The trustee’s only duty is to convey the property to the person who, in equity, is entitled to it. 12

b. Proof of facts necessary to establish a constructive trust must be by clear and convincing evidence. i. Examples of Wrongful conduct – Fraud. 2. Resulting Trusts a. Implied trust courts impose when an attempt to create a trust fails. The named “trustee” must distribute the property to whomever the court directs. The recipient receives the funds as an outright gift, unburdened by the trust’s terms. b. New York does not recognize Purchase Money Resulting trusts i. A purchase money resulting trust arises when, one person buys real estate in another person’s name with the understanding that the title holder will transfer title back to the purchaser (person providing money) on demand. ii. In most states, if the person refuses to return the property, the court will impose a PMS trust. iii. In New York, if you have such an agreement, “you take your chances.” c. But, the constructive trusts doctrine may apply when purchaser of and takes title in someone else’s name, if: i. The purchaser and title holder have a confidential relationship ii. Purchaser gave title to title holder in reliance on title holder’s promise to re-convey the property on demand; iii. Title holder breaches the promise to re-convey, and is thus unjustly enriched. OTHER TRUST-LIKE MECHANISMS: JOINT ACCOUNTS, TOTTEN TRUSTS AND THE UNIFORM TRANSFERS TO MINORS ACT 1. Joint account w/ right of survivorship a. To create a joint account, the depositor must use words of survivorship. i.e., “with right of survivorship.” b. A deposit of funds into a joint account is a gift of ½ of the amount to the other joint tenant. c. Withdrawal of more than one-half without other joint tenant’s consent; i. Destroys the right of survivorship and ii. Allows non-withdrawing depositor to recover the amount of the withdrawal that exceeds ½ of the account’s value. d. ** You cannot defeat the right of survivorship by will. (cannot be revoked by will) 2. Totten Trusts a. A totten trust is a bank account payable on death (P.O.D) b. Totten trusts are not real trusts because the account holder has no duties to the beneficiary. 13

c. Rules applicable to Totten Trust Accounts: i. If the beneficiary predeceases the depositor, the trust is automatically revoked ii. If the beneficiary survives the depositor, the amount in the account in subject to the claims of the depositor’s creditors. iii. By statute a Totten-trust can be revoked by will and a new beneficiary designated, but only if the will makes an express reference to the specific bank and the specific account. 3. Uniform Transfers to Minors Act (“UTMA”). Convenient way to make gifts to minors and avoid the need for a guardianship. a. Gift is made by transferring property to (or taking title in the name of) donee as custodian for (minor child) under NY Uniform Transfer to Minors ct. b. The custodian has the power to 1. Manage and invest the custodial property 2. Make payments to or for the minors benefit 3. To the extent not expended to pay the property to the minor when she reaches 21 unless the donor directs that the payout be made at age 18. c. Although the custodian is a fiduciary, a custodianship is not a trust because the custodian does not hold title to the custodial property. Legal title is in the minor subject to the custodian’s statutory powers. d. A custodial gift qualifies for the 11,000 dollars annual gift exclusion. 4. Federal Estate Tax Issues: If Donor is also custodian, the amount in the account on Donor’s death will be included in Donor’s estate for federal tax purposes.

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