Law School Resources

I. CREATION OF TRUSTS -

Definition of a Trust – Property transferred to one person for another’s Benefit,

A.     Elements of a Trust – MUST ALL be Present WITH INTENT

·        INTENT by Grantor to set up Trust in order to set up an Express Trust-

·        Must be Definite and Ascertainable NOT Precatory.(unclear; subject to interpretation)     

·        Typical Issue arises when Will has language stating “I desire…” “I would like…” – does this set up an Ascertainable Standard or D’s desires?

·        Intent is Required and is Fatal to "Trust" if not present at inception of Trust:

·        Osbom v. Empire Life Insurance Co., 342 So. 2d 763 (Ala. 1977)

1.   TRUSTEE -holds Legal Title of property For the Benefit of Another, a/k/a Fiduciary Law of contracts has played important role in development of Fiduciary law.

a.       How important is a Trustee?

·        KEY: A Trust will NEVER fail for lack of a Tr’ee 

·        Court would appoint a substitute trustee if none existed.

2.      BENEFICIARY- holds Equitable Title of property held in Trust. A person who has any Present or Future Interest, Vested or Contingent, in the Trust; the owner of an interest by assignment or other transfer as it relates to a charitable Trust; and any other person entitled to enforce the Trust –

a.      Trust must vest in an Ascertainable Beneficiary prior to violation of Rule Against Perpetuities or No Trust Exists.

·        Reason-is that someone must be able to enforce the Trust

b.      A Trustee must be able to Ascertain the Beneficiary either expressly or from among a definite class of people. Connell v. Cole, 89 Ala 381.

·        If not at inception of the Trust it must be within the period of time allowed by the Rule against Perpetuities

3.      CORPUS - MOST IMPORTANT ELEMENT Defined as: Trust property or interest in property held for someone's benefit.

a.       Lack of Corpus is Fatal to legitimate intent to create Trust. .

(1)   Determinability of interest - Interest must defeasible -Any interest-in property that can be transferred is eligible for use as the Corpus of a Trust.

(2)   Sufficiency of value or amount of assets of Trust is non-controlling

(3)   Standby Trusts -Estate planning tool- fund it with a single dollar bill stapled to the last page.

·        People often set these up as Inter Vivos Trust – upon their death, the Trust is already established and therefore their assets can go into the trust at their death instead of through Probate.

(4)   Interest must be more than mere expectation. Future capital gains in stock that is not held by the Trust is insufficient.

·        Brainard v. Commissioner, 91 F. 2d 880 {US Ct. App. 7th Cir. 1937)

·        Expectation to create a Trust does NOT consist of transfer of Corpus – the Corpus MUST be Tangible and Conveyable (Defeasible Interest).

2. Formalities which must be met in order to create valid Trust.

1.      Must be for a Lawful Purpose. A Trust that is established for an illegal purpose is void ab initio, per Alabama.Code §35-4-251

2.      Grantor/Settlor must have Capacity to convey property.

·        Hodge v. Joy, 92 So. 171 (Ala. 1928).

3.      For Property OTHER THAN Real Property, Trust Document CAN BE Oral.

a.       In order for Real Property to be included as the Corpus of a Trust, the Trust must be in Writing and document must be executed with all Formalities of a Deed of Conveyance (two witnesses; Grantor’s signature), due to Statute of Frauds. Ala. Code §35-4-255.

4.      Evidence of Intent -Intent must be present at inception of Trust in clear and definite evidence, but may be manifested orally, Johnson v. Amberson, 37 So. 273 (Ala. 1904), in writing, or may be discernible through Grantor's conduct, G1ennon v. Harris, 42 So. 1003 (Ala. 1907).

5.      Conveyance of Property

6.      Accumulation Trusts – Trusts that state that Trustee CANNOT pay out any Income (established for Sole purpose of Accumulation of Assets) may last no longer than 10 years. Except where the Trust is for the benefit of someone who at the time of inception of the Trust is a life in being and is a minor. Ala.Code §35-4-252.

·        NOTE: If Trust gives Trustee the Discretion to pay out Income, Trustee can decide to NOT pay out any Income, effectively turning the Trust into an Accumulation Trust.

7.      Where Trust is missing Formalities, Ct will Create an Implied Trust - Constructive Trust

·        Goodman v Goodman 907 P 2d 290 (1995)

·        ISSUE: PR of D's estate brought suit to recover money transferred by D to his mother before his death to hold in trust for children. After jury found in favor of estate, the Court granted judgment notwithstanding the verdict (JNOV) for mother. Estate appealed. The Court of Appeals affirmed. Estate appealed.

·        HELD: Statute of limitations defense presented question of fact that could not be decided as matter of law. Court created Constructive Trust. Reversed.

C.   Methods of Creating Trusts

1.      Express Trusts.

a.       Created by reducing an agreement between the Grantor and Trustee to an Executed Written Document.

·        Generally with.a Declaration of Trust document

·        Ala. Code § 35-4-251, and Sayre v. Weil, 10 So. 546 (Ala. 1892).

b.   Created by Express Oral agreement between Grantor and Trustee that adheres to all formalities for property to be held in Trust.

2.      Testamentary Trusts. - Created by valid Will; the Will must be held valid.

·        Dauphin v. Gatlin, 53 So. 2d 580 (Ala. 1951).

a.       Family Bypass Trusts – Amt allowed by Unified Credit to pass free from Estate Taxes D wills to kids/others an amount equal to Exemption Equivalent.

b.      Marital Trust – usually Remainder of Estate NOT specifically devised or placed in Family Trust goes into Marital Trust; D’s Estate allowed Deduction on Estate Tax return.

(1)   At death of Surviving Spouse's, amount in Marital Trust would be then included in SS’s Estate (after utilization of Exemption Equivalent) for Estate Tax purposes).

c.   QTIP Trust – Surviving Spouse is Lifetime Beneficiary with the Terminal Interest going to Other (typically the D’s kids from his original marriage).

·        Qualifies for Marital Deduction on D’s Estate Tax Return

·        Included in SS’s Taxable Estate.

d.   Generation Skipping Transfer Tax – In Addition to Estate tax, GST at the rate of 50% of a Generation Skipping Transfer

(1) GST is transfer to someone two generations (approximately 43 years) younger than D

(2) Exemption Exclusion of $1.1 million – Gift and Estate combined.

3.      Totten Trusts – A method to Avoid Probate

·        Reason to avoid Probate – is Privacy. Only persons allowed to see the Trust Document is Settlor, Trustee, Beneficiary and IRS. NOT a Public document, as the terms of a Will would be.

·        NOTE: To set up an Inter Vivos Trust that is intended to serve as a Testamentary Trust, you must meet the requirements of setting up a Will (Grantor signs; Two Witnesses)

a.       Account held with at a Bank/Brokerage that is set up by D and is Payable on Death (POD) to a stated Beneficiary. Typical situation treats the "Trust" as a Revocable Trust.

·        Another way to avoid Probate is to set up account as JTWRS

·        HOWEVER – any JTWRS can take what they want out of the account

b.      Alabama Treatment - Per Underwood v. Bank of Huntsville, 494 So.2d 619 (Ala. 1986), allows, treating it the same as a Traditional Trust or Irrevocable Trust.

·        TIP: If the goal of the D is to have coverage over their finances when they become incapacitated, but not worry that someone has the ability to drain the account, set up a Durable Power of Attorney.

4. Implied Trusts – Two Types

a.       Constructive Trust -not a real Trust but an Equitable Remedy. When one Party wrongfully holds property of another the court will impose a Constructive Trust in order to convey the property to the rightful owner .

·        Interstate Truck Leasing, Inc. v. Bender, 608 So. 2nd 716 (Ala. 1992).

b.      Resulting Trust –

(1)   A Settlor has Intent and Corpus to create Trust, but attempt fails for some reason

·        McClure v. Moore, 565 So. 2d 8 (Ala. 1990).

(2)   When Title of property is transferred Improperly to someone other than Purchaser thru a mistake.  Cone v. Cone, 331 So. 2d656(Ala. 1976).

D.   Future Interests

1.      Possible Parties to Future Interest

a.       Interest Retained by Grantor;      b.  Future Interest held by Beneficiary / Donee

2.      Types of Future Interests held by Grantor

a.       Possibility of Reverter  - Property can Automatically Revert back to Gr’or upon the occurrence of a stated event  - “To X for as long as the property is used as a school…”

b.   Right of Reentry – Property can revert back to the Gr’or IFF Gr’or Takes Action to get the Property back – NOT Automatic.  - “To X for so long as…, but if not…”

c.       Reversion – Remainder back to Gr’or at end of set term to another – Automatically back to Gr’or - “To X for life…” at X’s death, property goes back to Gr’or

3.      Types of Future Interests held by Person Other Than Grantor

a.       Remainder – similar to Gr’or’s Reversion

(1)   Indefeasibly Vested Remainder

·        “To Trustee for A for A’s life, then to B.”

(2)   Vested Remainder s:t Open

·        “To Tr’ee for A for A’s life, then to B’s children”  - Don’t know how many kids that B will have during A’s life.

·        BUT if B predeceases A, the number of kids CAN be determined, and this type of Future Interest becomes a Indefeasibly Vested Remainder.

(3) Vested Remainder s:t Complete Defeasance

·        “To Tr’ee for A for A’s life, then to B if B survives A.”

(4)  Contingent

·        “To Tr’ee for A for A’s life, then at death of A, equally to A’s kids, per stirpes.” (since per stirpes, A’s kids have to survive A in order to collect.

b.   Executory Interest – similar to Gr’or’s Right of Entry

·        “To B for so long as liquor is not sold on the property, but if they do to C”

II.  TRUSTEE DUTIES AND ADMINISTRATION

A. Standard of Care -Prudent Person standard. Ala. Code § 19-3-120.2 states that when acting on behalf of the Beneficiary the Trustee/ fiduciary shall act with the Care, Skill, Prudence and Diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use to attain the purposes of the account.

B.  Duties required of Trustees.

1.      Duty of Loyalty. MOST IMPORTANT DUTY- Per Walding v. Walding, 320 So. 2d 687, (Ala. 1975), a Tr’ee MUST act with complete Loyalty towards the Trust. There must be No Self Dealing. A Trustee must NOT make or retain an investment in its own stocks or bonds. CANNOT hold more than 15% of own stocks or Bonds without Notice AND Waiver.

2.      Not to Profit from Confidential Relationship.  – Reasonable Compensation as agreed upon PRIOR to acceptance of Tr is expected. However, Trustee may earn only the stated or agreed-upon compensation from the Trust, and NOT profit from his knowledge of OR Management of the Tr assets.

3.      No Conflict of Interest. Trustee must not accept subsequent positions that are in conflict of Trust.

4.      Duty to Preserve Trust Property - convert non-productive property. - Trustee has duty to make non income producing property productive, per Bank of Montgomery v Martin.

5.      Duty to Deal Impartially w/ ALL Vested Present & Future Interest Benefcy Absent instructions found in the Trust document otherwise, Tr’ee may NOT favor interests of one Beneficiary over another – i.e: income vs. remainder.

C. Administration of Trustees

1        Legal Title bestowed upon Trustee - Trustees take only that amount of Title needed to perform their duties. Ala. Code § 19- 3- 3. Absent Express power otherwise, Ct MUST approve all sales of Trust property Street v. Pitts 192 So. 258 (Ala. 1939).

2.      Unanimous Consent of Trustees required to conduct business of Trust,                             per Ala.Code §19-3-325,  EXCEPT:

a.      Where Trust Document allows otherwise

b.      Only one Tr’ee req’d to Receive Tr property.

c.       Exigent circumstances; immediate action req’d to preserve property; and

d.      Power to acct for other Tr’ee has been delegated to a single Tr’ee

3.      Court Removal of Tr’ee (absent Provision in Trust document allowing otherwise)

a.       Upon the filing of a Complaint by any person interested in the execution of a Tr, including the settlor, the Circuit Court MAY remove any Tr’ee who has harmed or if not removed will harm the Tr.

·        Henley v. Birmingham Trust National Bank, 371 So. 2d 883 (Ala. 1979).

4.   Trustee Powers

a.       Co-mingling or Pooling of Assets - Corporate Trustees MAY Mingle Assets of Trusts that are similar or like. Must keep separate accounting for each Trust.

·        Upon request of Beneficiary must account or to court if necessary

b.   Power to Invest assets of Trust

(1)   Prudent Investor Rule - Ala Code §19-3-320(5). The Prudent Investor Rule states that a Tr’ee must make careful, prudent investments exercising whatever special skills he has both to preserve the Corpus of the Trust and to produce a regular income from the Trust assets.

·        Henley v. Birmingham Trust National Bank, 371 So. 2d 883 (Ala. 1979)

(2)   Constitutionally Approved Investments. "Legals" - Ala. Code § 19-3-120 sets out that unless otherwise authorized or directed by the court having jurisdiction thereof, or by the Will, Trust Agreement or other governing document, a fiduciary may, with the exercise of Reasonable Business Prudence, invest funds in securities or investments which, at the time of purchaser included in the following classes:

i.         Bonds or other interest bearing obligations of the U.S.; or

ii.       Bonds issued by the Federal Land Bank; or

iii.      Bonds or other interest bearing obligations of any U.S. State; or

iv.     Bonds or other interest bearing obligations of any county of Alabama that has not defaulted on a bond in the preceding 5 years; or

v.       Interest bearing obligation of any board of education of any county or city in Alabama secured by a pledge of the school tax; or

vi.     vi. First mortgages on improved real estate; or

vii.    Saving accounts in an F.D.I.C insured bank; or

viii. Bonds that have been authorized by the Ala Securities Commission and secured

  by first mortgages.

5.   Power to Terminate Small Trusts -  If market value of Trust is less than $25,000, OR Cost of Administration outweighs the purpose of the Trust, Trustee may terminate and distribute assets to Beneficiaries per Alabama Code §19-3-323

6.   Power to Resign.

a.       A Trustee may upon 30 Days Notice in Writing to Beneficiaries AND Acceptance by the Circuit Ct, resign as Trustee per Ala. Code §19-3-210

b.      Resigning Trustee STILL responsible for Final accounting to the Court

·        Drane v. Gunter, 19 Ala..731 (Ala. 1851)

7.   Remedies against Trustee who has Breached Duty of Care to Beneficiaries

a.       Removal of Trustee – Trust document should provide for removal WITHOUT Cause (since WITH Cause allows the Trustee to use Trust assets to defend himself)

b.      Reimbursement/Indemnification from Trustee to Beneficiaries of

·        Lost Trust Principal

·        Income “lost” by Trust due to Breach

·        Income “gained” by Trustee as result of Breach

c.       A combination of the two above remedies

8.   Powers of Successor Trustees.

a.       Except for powers that were personal to the prior Trustee, successor Trustees are given all powers and title to the position.

·        Silverstein v. First National Bank, 165 So. 827 (Ala. 1936).

9.   Enumerated Powers. Ala. Code §19-3-322.

a.   Receive (subject to the Trustee's approval), collect, hold and retain for such time as the Trustee shall deem advisable, property, real or personal, including property in which the Trustee or any related party is personally interested.

b.      Sell, purchase, exchange, execute options for, partition, or otherwise dispose of or acquire, any property or interest therein which the Trustee may hold from time to time, at public or private sale or otherwise, including such transactions with or involving any related party as principal, or agent, upon such terms and conditions, including credit, and for such consideration as the Trustee shall deem advisable, including reasonable compensation for any such related party, and to transfer and convey the property or interest therein which is at the disposal of the Trustee, in fee simple absolute or otherwise free of all Trust; provided that the Trustee or the related party discloses to the current Beneficiary in any reasonable manner (including by confirmation, account statement, prospectus, or otherwise) the terms of the transaction, including any fee paid to the related party. For purposes of the immediately preceding sentence, compensation charged by or paid to a related party shall be conclusively presumed to be reasonable if such compensation is consistent with any standard fee table maintained by the related party in the ordinary course of business;

c.       Invest and reinvest the Trust assets in securities, investments and other property which are authorized as investments for Trust assets under §19-3-120;

d.      Continue or participate in the operation of any business or other enterprise in which the Trust owns an interest and to effect incorporation, dissolution, or other change in the form of the organization of the business or enterprise;

e.       Acquire or dispose of an asset for cash or on credit at a public or private sale; manage, develop, improve, exchange, partition, change the character of, or abandon a Trust asset or any interest in it; encumber, mortgage, or pledge a Trust asset for a term within or extending beyond the term of the Trust in connection with the exercise of any power vested in the Trustee;

f.        Make ordinary or extraordinary repairs or alterations in buildings or other structures; demolish any improvements; or raze existing or erect new party walls or buildings;

g.       Subdivide, develop, or dedicate land to public use; or dedicate easements to public use w/out consideration;

h.       Enter for any purpose into a lease as lessor or lessee with or without option to purchase;

i.         Enter into a lease or arrangement for exploration and removal of minerals or other natural resources or enter into a pooling or unitization agreement;

j.        Grant an option involving disposition of a Trust asset or take an option for the acquisition of any asset;

k.      Pay from income or principal, any and all expenses reasonably necessary for the administration of the Trust;

l.         Receive additional property from any source and to administer the additional property as a portion of the appropriate Trust estate under the management of the Trustee;

m.     Deposit funds in a bank or other financial institution, including in a separate department of the Trustee or in any related party;

n.       Borrow money for such periods of time and upon such terms and conditions as to rates, maturities, renewals, and security as the Trustee shall deem advisable;

o.      Make advances for the benefit or protection of the Trust and for any or all expenses, losses and liabilities sustained in the administration of the Trust or as a result of the holding or ownership of any asset by the Trust;

p.      Vote shares of stock or other securities, in person or by special, limited, or general proxy, with or without power of substitution, or to determine to not vote such shares of stock or other securities;

q.      Hold any security at a qualified depository in the name of a nominee or in other form without disclosure of the fiduciary relationship;

r.        Exercise all options, rights, and privileges to convert stocks, bonds, debentures, notes, mortgages, or other property into other stocks, bonds, debentures, notes, mortgages, or other property, and to subscribe for other or additional stocks, bonds, debentures, notes, mortgages, or other property so acquired as investments of the Trust so long as the Trustee shall deem advisable;

s.       Unite with other owners of property in carrying out any plans for the consolidation or merger, dissolution or liquidation, foreclosure, lease, or sale of the property or the incorporation or re-incorporation, reorganization or readjustment of the capital or financial structure of any corporation, partnership, company, or association, the securities of which may form any portion of the Trust estate;

t.        Modify the interest rate from time to time on any obligation, whether secured or unsecured, constituting a part of any Trust;

u.       Continue any obligation, whether secured or unsecured, upon and after maturity, with or without renewal or extension, upon such terms as the Trustee shall deem advisable, without regard to the value of the security , if any, at the time of the continuance;

v.       Effect a fair and reasonable compromise with any debtor or obligor, or extend, renew, or in any manner modify the terms of any obligation owing to the estate;

w.     Carry such insurance coverage, including public liability, for such hazards and in such amounts, either in stock companies or in mutual companies, as the Trustee shall deem advisable in connection with holding and administering the Trust estate;

x.       In the discretion of the Trustee, resign as Trustee by giving not less than thirty days' written notice to the adult current Beneficiaries, or if none then a court of competent jurisdiction, who shall appoint the successor Trustee;

y.       Institute and defend any and all suits or legal proceedings related to said Trust estate, in any jurisdiction; and to employ counsel, expert witnesses or other agents; and to compromise, adjust, submit to arbitration, bring or defend actions on, abandon, or otherwise deal with and settle any dispute or claim in favor of or against the Trust estate as the Trustee shall deem advisable;

z.       Employ and compensate, out of income or principal, or both, and in such proportion as the Trustee shall deem advisable persons deemed by the Trustee needful to advise or assist in the proper management and administration of the Trust;

aa.   Acquire, receive, hold, and retain undivided the principal of several Trusts created by a single instrument until division shall become necessary in order to make distributions;

bb.  Make distribution of principal assets of the Trust in kind or in cash, or partially in kind and partially in cash, in divided or undivided interests, as the Trustee finds to be most practicable and for the best interests of the distributees;

cc.   Make payments in money, or in property in lieu of money, to or for the benefit of a minor or incompetent in anyone or more of the following ways:

(1)   Directly to the minor or incompetent;

(2)   Directly in payment for the support, care, maintenance, education, and medical, surgical, hospital, or other institutional care of the minor or incompetent;

(3)   To the legal or natural guardian of the minor or incompetent; or

(4)   To any other person, whether or not appointed guardian of the person by any court, who shall, in fact, have the care and custody of the person of the minor or incompetent. The Trustee shall not be under any duty to see to the application of the payments so made if the Trustee acted as a prudent person in the selection of the person, including the minor or incompetent, to whom the payments were made; and the receipt of the person shall be full acceptance to the Trustee;

dd.  Allocate items of income or expense to either Trust income or principal, as determined in accordance with the provisions of Article 12 of Chapter 3 of Title 19, or other applicable provisions of law; and

ee.   Make contracts and to execute deeds and instruments, under seal or otherwise, as may be necessary in the exercise of the powers granted in this article.

III. LIFE INSURANCE TRUSTS Crummey powers are important for Life Ins Trusts

A.     Unfunded Irrevocable Life Insurance Trusts -Grantor/Owner transfers policy only as Trust property. Annual gifts of up to $10M help pay for or completely pay for premiums.

B.     Funded Irrevocable Life Insurance Trusts – Grantor/Owner transfers in Policy and sufficient assets to pay for ALL premiums going forward.

C.     Rule Against Perpetuity Issues – Life in Being (includes time in the womb) + 21 years

1.      Per Ala. Code §35-4-260, for the determination of violation of Rule against Perpetuities, Life Insurance Trusts are created at the time of the Maturity of the Insurance policy NOT When Trust is set up.

IV. DISPOSITION OF TRUST ASSETS

A.     Support Trusts - Trust which is designated to be used for the Support of the Beneficiary(s). Usually accomplished using Ascertainable Standards of disbursement of Trust funds for the Support, Health, Maintenance or Education of Benef (Invasion Provisions).

·     Wells v Sanford “Unless something appears in the Will Indicating a different purpose, it is ordinarily Presumed that the Testator INTENDED the Benef’y to be Supported and Maintained from Estate Income or from the sale of part of the Corpus.”

·        Support Trust to be used to Support the Benef REGARDLESS of Benef’s own assets.

·     Marsman v. Nasca . Where Tr gives a Tr’ee a Discretionary Power to pay amounts of the Principal for the Comfort, Support and Maintenance of a Benef’y, the Tr’ee has a DUTY to inquire into the financial resources of the Benef’y so as to recognize his needs.

·        NOTE: NonAscertainable Standrds – Comfort; Best Interest; Welfare; Enjoyment.

1.      Imposes Duty to Tr’ee to distribute funds from the Tr for these purposes

a.   Trust can use all or pick or choose which, if any, to omit.

2.      Alabama Statutes state that if a Trust is established specifically for accumulation of Wealth, it cannot exist for more than 10 years.

B.     Discretionary Trusts (presuming that Grantor and Benef’y are NOT the same person) -Trustee holds Absolute and Sole Discretion when, if ever, to Distribute funds from Trust.

1.   “Sprinkle” Trust (Spray Trust) which allows that Distributions, if any at all, can be made in Equal Or Unequal portions to Beneficiaries and allow any undistributed income to be accumulated in the Trust.

·        Ingalls v. Ingalls, 54 So. 2d 296 (Ala. 1951)

·        Held: Discretion in Trust instruments to apply the income of Trust to the Comfort, Support and Education of the Beneficiaries during their minority meant that expenditures of income for Comfort, Support and Education of Beneficiaries was Mandatory and fact that father of Beneficiaries was financially able to furnish their support, did NOT relieve the Trustees of their duty to undertake to perform their Trust.

2.      Insulates Beneficiary (other than Grantor) from creditors claims and judgments. Trustee's discretion also insulates Benficiary's interest (other than Grantor) from being attached for child support.

·        Howard v. Spragins, 350 So. 2d 318 (Ala. 1977)

·        Held: Where divorced husband was income Beneficiary of testamentary Spendthrift Trust, language of such trust clearly evidenced Testator's intent that both corpus and income be used & that divorced husband's kids were Benefys

C. Spendthrift Trust

1.      Spendthrift Provision Prevents Beneficiary (other than Grantor) from Voluntarily or Involuntarily alienating his/her interest in Trust, Ala.§19-3-1.

·        Upheld in Peach v. First National Bank, 25 So. 2d 153 (Ala. 1946).

a.       Child Support and Spendthrift Provisions –Income of Spendthrift Trust CAN BE reached and Corpus of Spendthrift Trust MAY BE reached to satisfy claim for Child Support, since it is a legal requirement to pay, not voluntary.

·        Howard v. Spragins, 350 So. 2d 318 (Ala. 1977).

b.      Alimony in Gross is NOT attachable from a Spendthrift Trust.

c.       Periodic Alimony - under Alabama law, it is unclear whether is attachable to a Spendthrift Trust.   Majority of states hold that it is.

·        If Support Trust, MAY be able to get at Income;

·        If Discretionary Trust, most likely WON’T be able to get at Income

d.      Bankruptcy Proceedings - Spendthrift Trusts are protected from. U.S.C. § 541(c)(2), and Ala. Code §19-3-1

e.       Garnishment

D.           Invasion Trusts.

1.      Method of distributing assets on Benefy’s exercise to invade either income/ principal of Tr.

a.       This opens Trust assets to Beneficiary’s Creditors to the extent the Beneficiary may invade assets. Court of equity may force Beneficiary to invade for benefit of creditor. Ala. Code § 35-4-305.

2.      Crummey Power - Beneficiary has power to invade Trust annually for a set period of time. Power lapses if not used.

a.       Causes Trust to be considered a Present Interest.

b.      KEY: Req’d Provsn- Benef  must be given proper Notice of Power to Invade.

G. Revocable Trusts / Inter Vivos Trusts

1.      Trusts established during lifetime of Grantor

a.       Generally used for Aviodance of Probate and/or Control of Grantor's assets.

b.      Grantor generally retains power to amend or revoke Trust Agreement.

H.  Irrevocable Trusts

1.   Grantor relinquishes all control of Trust. May be used to lower income taxes obligation or estate tax liability of Grantor .

V. TAXATION OF TRUSTS

A.     For income tax purposes Income held in a Trust and not passed out to a Beneficiary is taxed at the highest personal rate of income tax after a $600 annual exemption. Trusts file a Form 1041 and MUST use a calendar year for income tax purposes.

·        Taxation of Income GENERALLY the Control over that Income

·        Tax Attributes of Income flows thru to Recipient (as in a P/S)

·        Gr’or Trust is one where Gr’or OR Gr’ors Spouse get the Income from the Trust

·        Gr’or Trust is ALWAYS taxed to the Gr’or

·        A Trust CAN be a Gr’or one year and a Non-Gr’or the next year…

B.     Inter Vivos or Grantor Trusts

1.      Revocable Inter Vivos do NOT offer any Income Tax OR Estate Tax savings. All assets in a Revocable Trust are INCLUDED in the Grantor's Taxable Estate.

2.      Irrevocable Trusts

a.       To the extent that the Grantor placed assets in excess of the annual exclusion upon formation it will be considered in the Grantor's Taxable Estate at death and will cause the need to complete a Gift Tax return form 709 for the year the assets were placed in the Trust. However the growth of the Trust will be outside of the Grantor's taxable estate.

b.      Generally Tax liability follows Control and or distributions. And if the Trust is for the benefit of the Grantor or her/his spouse it will be taxed to the grantor.

VI. MODIFICATION AND TERMINATION OF TRUSTS

·        DEFAULT status of a Trust in Alabama is IRREVOCABLE.

A.     Modification or Revocation through Actions taken by the Grantor.

1.      To Terminate or Modify, Grantor MUST Retain Power to Modify or Terminate at any time without consideration to any Beneficiary – “Revocation” Language Required  - “I reserve the right to Alter, Amend, or Revoke at any time by…”

·        Per Conn Genl Life v FNB Minn 262 NW 2d 403, where a Settlor reserves the Power to Revoke a Trust utilizing a specific method, the Settlor CAN ONLY Modify using that Method.

·        Therefore be careful when drafting Settlor’s Revocation clause

2.      If Settlor is also Sole Beneficiary, Power to Revoke or Modify is Implied – no Specific “Revocable” Language is necessary

·        First Natl Bank of Anniston v. City of Jacksonville, 184 So. 338 (Ala. 1938).

B. Modification or Revocation through Actions taken by Beneficiaries.

1.      If all Beneficiaries transfer their interests to the Trustee, “Merger of Interest” doctrine comes into play and Tr is terminated.  Johnson v. Johnson, 5 Ala. 90 (Ala. 1843).

2.      While some jurisdictions allow early termination upon consent of all Beneficiaries, except in the occurrence of a transfer of interest, Alabama does NOT allow Beneficiaries alone to force premature Termination of Trust.

·        Ramage v. First Frmrs Merchants Natl Bnk, 30 So. 2d 709 (Ala. 1947).

C. Consent Modification or Termination by ALL Parties.

Trust can be Terminated OR Modified by Consent Agreement.

·        John v. Birmingham Trust & Savings Co., 88 So. 835 (Ala. 1921)

·        NOTE: Where Settlor was deceased and all Beneficiaries agreed to Terminate and also where Beneficiaries had power to terminate early. Court granted only after hearing all Motions and Evidence before Termination. Wheeler v. First Alabama Bank, 385 So.2d 47

D. Modification or Termination by Third Parties W/OUT Consent of All Parties Through actions taken by the Court.

1.   Mistake. – Ct will Modify where Trust will not accomplish Settlor's intent due to Mistake by Settlor; Court of Equity can reform Trust provision to Remedy Mistake.

·        Goodwin v. Yonge, 22 Ala. 553 (Ala. 1853).

2.   Impracticability of Trust purposes. - Trust can never accomplish Settlor's intent because of Frustration of Purpose or purpose of Trust has become impossible to achieve court can order property sold. Ala. Code §19-3-171

·        i.e where Real Prop put in Trust; 10 years later the neighborhood changes and the property can’t rent for enough to pay its property taxes.

3.      Needy Beneficiary - Despite adverse interests in Trust, Court may grant modification to care for Beneficiary with special needs (i.e. Equal Benef’ys where Benef’y 1 is brain surgeon; Benef’y 2 is brain damaged).

4.      Doctrine of Equitable Approximation - Allows a court to modify a Trust, (not dispositive provisions) to allow for easier Administration.

·        Heustess v. Huntingdon College, 242 Ala. 272, 5 So.2d 777 (Ala 1942)

E. Termination through the Document OR by Operation of Law

1.      Trust usually lasts until the Occurrence of such Event as outlined in Trust Document to cause termination. Or Trust will last as long as necessary to accomplish the Settlor’s purpose.

·        Trust needs to have a Termination date/occurrence.

·        Ala. Code §19-3-2

2.      Merger of Interests. - When both Legal Title and Equitable Title Merge into one person the Trust will Terminate.

a.       However if multiple of any interest exists, Trust will not terminate due to merger of one person's interests. First Ala. Bank v. Webb, 373 So. 2d 631 (Ala. 1979), and Thurlow v. Berry, 247 Ala. 631,25 So.2d 726 (1946).

3.      Passive Trusts. A Trustee must have active duties to perform or the Trust will be a "passive" Trust. Ala. Code §35-4-250. If a Trust is set up such that the Tr’ee is NOT required to perform any active Duties, the legal title is passed to the Beneficiary and the Trust is terminated due to the merger of interests. Henderson v. Henderson, 97 So. 353 (Ala. 1937).

4.   Where purpose of Trust becomes Illegal or Impossible, the Trust will Terminate.

VII. CHARITABLE TRUSTS

·        NOTE Ala allows Unincorporated Organizations (not “properly” formed under IRC 501(c)) to be a Beneficiary of a Charitable Trust, if the organization is for a purpose as outlined above, whether or not the Organization has the authority to Hold Title to real property (if not Organized, no party can really hold any title).

·        Since IRS looks to Local Probate Court for determination, Charitable Contribution allowed on Tax Return

·        Enterprise Lodge v. First Baptist Church, 264 So.2d 153 (Ala. 1972)

3.      Time frames for making a Charitable Gift.

a.       Deathbed Gifts. Ala allows Charitable Gifts ANY time during life, through a Testamentary gift. Gifts Causa Mortis or Mortman gifts are Allowable in Alabama.

b.      Rule Against Perpetuities and Charitable Trusts. - Once vested within the period prescribed by the Rules Against Perputuities, a Charitable Trust may continue into perpetuity and does NOT have to comply with the rule.

·        Henderson v. Troy Bank & Trust Co., 34 So. 2d 835 (Ala. 1948).

4.   Complex Trust v. Simple Trusts -Ala does NOT require that a Trust have either all Charitable distributions or all private distributions.

·        Income CAN BE Accumulated

·        Cannot be for benefit of a charity; Income Beneficiaries and Remaindermen are same.

·        NOTE: QTIP Trust is typically a Simple Trust, BUT can be a Complex Trust if Remainder Interest goes to Charity.

6.   All Elements and Formalities of a private Trust are also Required for Charitable Trust.

a.   Trustee, Corpus, Beneficiary, etc.

7.   Charitable Trusts are favored over Private Trusts. Because of the benefit for the public good courts give difference to charitable Trusts.

·        Crippled Children's Foundation v. Cunningham, 346 So. 2d 409 (Ala. 1977)

8.   Enforcement of Charitable Trusts. - Attorney General of  State holds power to enforce charitable Trusts.

·        Baxley v. Birmingham Trust National Bank, 334 So.2d 848 (Ala. 1976)

B.   Modification of Charitable Trusts

3.   Alabama has statutorily adopted Cy Pres for Charitable Trusts.

Ala. Code §35-4-251. – Trusts may be created for lawful purpose; necessity for legal title to vest in trustees. Nothing in section 35-4-250 contained shall prevent the conveyance of real or personal property, or the issue, rents and profits thereof, to another in trust for the use of the grantor, or his family, or of a third person, or for any other lawful purpose; including specified charities, whether the beneficiaries of the charitable gift are adequately or inadequately set out in the instrument. But for a trust to be valid as a trust the legal title throughout the trust must vest in one or more trustees, with the power and duty to manage the trust property, subject to the supervision of the courts; and if a trust for charity is impracticable, or too indefinite to admit enforcement, or ceases to admit of practicable enforcement, a court on application of the trustee or of any person charged alone or with others with the administration of the charity may order an approximate or cy pres carrying out of the trust.

·        However, Cy Pres is disfavored by the Ala Sup Ct and is only used in narrow specific type of cases. Alabama Supreme Court prefers the name of "Judicial Approximation" when modifying a Charitable Trust.

a.       There was no designated class or person which was not in existence when the testator died; therefore, judicial cy pres was inapplicable.

·        Biles v. Martin, 259 So.2d 258 Ala. 1972.

b.      Tumlin v. Troy Bank & Trust Co., 258 Ala. 238, 61 So.2d 817 (1952), Ala. Sup Court said: ". ..this Court has consistently held to the principle that a court of equity in administering a charitable Trust has a right to vary the details of such administration so that the Trust may be used for the Beneficiaries which are named or designated by description. It is wholly immaterial whether that power is called cy pres, as it is in some states, or approximation as it is in Alabama." 

VIII. POWER OF APPOINTMENT

A.     POA is a Power created (given) by a Donor to a Donee that authorizes the Donee to designate Appointees (recipients) of the property.

B.     General Power – Power where the Donee can appoint the property to himself, his Creditors or his Estate.

·        NOTE: S, H, M, and E can be broadly interpreted…

·        If Donee dies with a General POA the underlying property is required to be included in the Donee’s Gross Estate at his death.

C.     Limited Power - Power where the Donee cannot appoint the property to himself, his Creditors or his Estate.

·        NOTE: a 5% or $5,000 Lapse Power is an example of a Limited Power.

D.     Exercise of General POA either Inter Vivos or Testamentary (via a clause in a Will) – Alabama REQUIRES that a Specific Reference to the General POA be made in order to have a valid exercise of the POA.

·        i.e. D’s Notice to Trustee (if Inter Vivos) or Will (if Testamentary) should reference the specific Trust Document section that contains the General POA

IX. RULE AGAINST PERPITUITY

A.   “No interest in property is good unless it must Vest, if at all, not later than 21 Years plus a gestation period after Some Life or Lives In Being at the time of the Creation of the Interest.”

1.      Alabama does observe and enforce the RAP

2.      RAP is NOT Applicable to

(a)    Present Interest (since it is already Vested)

(b)   Future Interest held by the Grantor (b/c Grantor is already Vested with the Interest)

3.      RAP IS Applicable to

(a)    Future Interest held by a Transferee –

(1)   an Indefeasibility Vested Remainder (i.e. the Remainderman of an Irrevocable Trust);

(2)   a Vested Remainder subject to Defeasance

(3)   a Contingent Remainder

B.     Vesting and Measuring Life – i.e when the Interest becomes Identifiable

1.      When will the Interest Vest

·        Example: T devises property in Trust with directions that income s/b distributed to "A for life, then to A's children and their heirs as long as at least one child of A remains alive; at death of A's last child, the principal s/b distributed to those of A's grandchildren then living."

·        T's will creates 2 Future Interests: the first in A's children, the second in those of A's grandchildren who survive A's last surviving child.

·        A's Children's Interest:

·        If A does NOT yet have Children, the interest is a Contingent Remainder

·        If A DOES yet have Children, the interest is a Vested Remainder, subject to Open – the Interest will Vest Indefeasibility at A's death, when he can have no other children.

·        A's Grandchildren Interest:

·        At the time of A's death, they have a Contingent Remainder – whether or not any grandchildren of A have yet been born. That Interest will Vest at the death of A's last surviving child.

·        NOTE: At that time, the "Class" closes.

C. Life In Being

1.      Have to be able to name a Life In Being – the reference life must be able to have a name  –   i.e - baby Tandet" . The life must be around at the time that the Interest becomes effective.

D. Tolling of the Time Period – Irrevocable Life Insurance Trust. Since the Interest does not Vest (is not created) until the death of the insured, the Irrevocable Life Insurance Trust can be set up years before any measuring period.

E.      Consequences of Invalidity – Court will blue-line the invalid provision.

1.      Doctrine of Infectious Invalidity

X.  ALABAMA PRINCIPAL AND INCOME ACT

A.     Introduction – Act attempts to address Four Questions

1.      How is Income that is earned during the Probate of a D’s Estate to be Distributed to Beneficiaries of the Trust, and whether those Distributions are Residual, General, or Specific;

2.      When does an Income Interest in a Trust BEGIN and also what Property is Income and what is Principal;

3.      When does an Income Interest in a Trust END and who gets accrued but unpaid Income, and who gets Paid but Undistributed Income; and

4.      How should the Receipts and Disbursements of Income be allocated by the Trustee twix Income and Principal Interests.

B.   Effective  January 1, 2001.

1.      Applies to all existing Trusts/Estate created before I January 2001, however, until January 2003 any interested party may elect to use the law in effect prior to January 2001. Ala Code 19-3A-605

C.   Default Rule ONLY – only is applicable if Trust instrument is silent

1. A Fiduciary shall administer a Trust or Decedent's Estate in accordance with the terms of the Trust or the Will, even if there is a different provision in this chapter; Ala. Code 19-3A-I 03.

2.      Trustees still has Discretion granted in document to allocate expenses and funds between Income and Principal in accordance with the Document.

C. Income derived from Specific Bequests, General / Pecuniary Bequests or Residuary / Remainder Bequests

1.   Trustee shall Distribute all Income derived from property Specifically Bequested, whether it accrued before or after the date of death of Testator/ Grantor. Ala. Code §19-3A-201(a).

2.      Trustee will pay Income derived from a Pecuniary or General Bequests subject to expenses of Estate Trust.(i.e. after Expenses are paid – usually that occurs 6 mths after D of D, since the six-month claims period is over) Ala. Code §19-3A-201(b).

3.      Trustee shall pay fractional share of income derived from Residuary/Remainder Interest between the Residual remainder Beneficiaries. Ala. Code §19-3A-202.

4.      Beginning date of income accrual. An Income Beneficiary is entitled to Net Income from the date on which the Income Interest begins. An Interest Income begins on the date specified in the terms of the Trust, or  if no date is specified, then on the date an asset becomes subject to a Trust or a successive Interest.  Ala. Code § 19-3A-30 1.

D. Allocation of Receipts during administration. Ala. Code §19-3A-401

1.   All Money (Cash) received subsequent to creation of Trust or estate shall be allocated to Income EXCEPT where the Fiduciary receives:

a.   Property other than Money (Cash), if the Trustee has discretion over what type property is received it should allocated to Income; or

b.      Money, either in single payment or installments, in exchange for part or all of Trust's Interest in a Business; or

c.       Money that is considered a Capital Gain Dividend for federal income tax purposes.

2.   Principal Allocations - a. Fiduciary shall allocate to Principal:

a.       To the extent not allocated to Income under this chapter, assets received from a Transferor during the Transferor's lifetime, a D's Estate, a Trust w/ a terminating income interest, or a payer under a contract naming the Trust or its Fiduciary as Beneficiary;

b.      Money or other property received from the sale, exchange, 1iquidation, or change in form of a principal asset, including realized profit;

c.       Amounts recovered from third parties to reimburse the Trust because of disbursements resulting from environmental issues of the property or for other reasons not based on the loss of income. Ala. Code § 19-3A-40 1

3.   Mineral, Water, and Other Natural Resources

a.       Receipts from an interest in a Non Renewable source (sand, gravel, oil, gas) will be allocated 90% to Principal and 10% to Income.

b.      Receipts from a Renewable Source will be allocated to Income.  Ala. §19-3A-411.

4. Timber. -To the extent that a Fiduciary accounts for Receipts from the sale of timber and related products, the Fiduciary shall allocate the net receipts first to principal, based upon the volume of the timber at the time of transfer to the Trust or D's Estate. The balance shall be allocated 80% to Income and 20% to Principal. Ala Code 19-3A-412.

5.      Allocation of Expenses. Fiducuiaries may use discretion on allocating expenses twix Principal and Income UP TO 50% from each. Ala Code § 19-3A-502. Otherwise from Income. Ala. Code §19-3A-501

a . Following expenses s/b allocated 100% against Principal

1.      Fees based upon transmission of assets (Executor’s fees to transfer Estate to Trust)

2.      Payment of the Principal portion of Trust’s debt

3.      Legal expenses concerning the Trust Principal

4.      Single Premium Insurance policies

5.      Payment of estate and Gift Taxes, such as GST

6.      Expenses for Environmental matters

6.      Transfer from Income to Principal for reduction in Value of Assets – Fiduciary MAY set aside a Reserve from Income to Principal for depreciation of Trust Asset

a.       CANNOT do this for real estate that any Beneficiary uses personally (even if Beneficiary pays FMV rent)