Underwriting Manual: TX
19.44
Trust And Trustees
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19.44.1
In General
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Trust And Trustees A trust is a relationship between assets and individuals. In a trust relationship, an individual or entity holds legal title to the property of another for the benefit of that person or a third person. Perhaps the simplest explanation of a trust is the following: property owned by A is conveyed to B for the benefit of C. A, the person who conveys the property and creates trust is called the settlor. B, the individual or entity given control over the property of A, is called the trustee. Technically speaking, the trustee becomes the legal owner of the property transferred into the trust. C, the person for whose benefit the property is held, is known as the beneficiary of the trust. The rules governing the trustee’s power and authority to deal with the trust property are set forth in a formal written agreement between the settlor and the trustee known as the trust agreement. If the trust is to become operative during the lifetime of the settlor, it is known as an inter vivos trust or living trust. If the trust agreement is embodied in the last will and testament of the settlor and thus does not become operative until after the death of the settlor, the trust is known as a testamentary trust. Title to land held in a trust by a trustee becomes a concern of the title examiner because the trustee’s power and authority to deal with the property is limited by the terms of the trust agreement between the trustee and the settlor. |
19.44.2
Parties to a Trust
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| · | Trustor The creator of the trust. A person who creates a trust by transferring title to real or personal property to a trustee under an agreement that the trustee will administer it for the benefit of another (the beneficiary). Also referred to as the “settlor”, “donor”, “founder”, or “creator”. |
| · | Trustee A person or legal entity holding legal title to real or personal property under an agreement for the benefit of another (the beneficiary). |
| · | Beneficiary A person for whose benefit a trust is created and who is, therefore, entitled to the benefits of the trust; someone possessed of the enjoyment of property, the legal title to which is vested in the trustee. Also referred to as the “cestui que trust”. |
19.44.3
Capacity of the Trustor
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| Anyone competent to contract may make such disposition of the legal title to his property as he pleases, may annex such conditions and limitations as he chooses, and may vest it in the trustees for the purpose of carrying out his intention. |
19.44.4
Intention to Create a Trust
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| It is essential to the validity of a trust that the language employed definitely indicate an intention to create a trust, and that the subject thereof, and the object or persons intended to have the benefit thereof, be certain. |
19.44.5
Classification of Trusts
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| Active trust. A trust under which the trustee has active duties imposed upon him in connection with the management or other handling of the corpus of the trust. This type of trust is to be distinguished from a dry or passive trust. |
Blind trust. A blind trust arises where property is conveyed or transferred to a trustee but the conveyance or transfer does not disclose the trust or identify the beneficiaries. Texas Property Code Sec. 101.001. CONVEYANCE BY PERSON DESIGNATED AS TRUSTEE. If property is conveyed or transferred to a person designated as a trustee but the conveyance or transfer does not identify a trust or disclose the name of any beneficiary, the person designated as trustee may convey, transfer, or encumber the title of the property without subsequent question by a person who claims to be a beneficiary under a trust or who claims by, through, or under any undisclosed beneficiary or by, through, or under the person designated as trustee in that person's individual capacity. If the trustee of the blind trust dies while in title, with no evidence of who the beneficiaries are or that the trust actually exists, the heirs are presumed to be in title. Jordan v. Exxon Corp, 802 S.W.2d 880 (Tex. App.-Texarkana 1991, no writ). |
| Charitable trusts. A trust designed for the benefit of a class in particular or the public in general. As a general rule the individuals who may benefit are indefinite in number and uncertain. |
| Complete voluntary trust. A trust completely created. The subject matter being designated, the trustee and beneficiary being named, and the limitations and trusts being fully and perfectly declared. |
| Constructive trust. A trust which arises entirely by construction of law or by operation of law, independently of any actual or presumed intention of the parties, and often contrary to their intention, for the purpose of promoting justice for frustrating fraud. |
| Contingent trust. A trust that depends for its creation and operation on the happening of a future event. |
| Conventional trust. A trust created by decree of a court of competent jurisdiction. |
| Direct trust. An express trust, as distinguished from a constructive or implied trust. |
| Directory trust. A trust which is not completely and finally settled by the instrument creating it, and is subject to be molded or applied according to subsequent directions of the grantor. |
| Discretionary trust. A discretionary trust is one where, by the terms of the trust, no direction is given as to the manner in which the trust fund shall be vested till the time arrives at which it is to be apportioned in satisfaction of the trust. |
| Donative trust. A “donative trust” is a trust not requiring payment of any consideration by the beneficiary. Such a trust may be created by transfer or property in trust may be created by transfer of property in trust as a gift for the benefit of another person or by proper declaration of the legal owner of property that he will hold it in trust for another’s benefit. Where such a trust is created, the law of trusts is superimposed on the law of gifts or the law of wills. |
| Dry trust. A trust in which the trustee is a mere passive depository of the legal title to the property, with no active duties to perform. This kind of trust is also known as “passive”, “simple”, “technical”, or “naked” trust. |
| Enforceable trust. A trust in which some person or class of persons have a right to all or a part of a designated fund, and can demand its conveyance to them. |
| Executed trust. An executed trust is one in which the terms and limitation of the trust estate are definitely and completely declared by the instrument creating it. |
| Executory trust. A trust in which the limitation are not completely declared, the settlor’s intention being expressed only in general terms, and something remaining to be done by the trustee, usually, the execution of some further instrument. |
| Express trust. A trust which is created by the direct and positive act to the donor or settlor, by some writing, deed or will, as distinguished from a trust inferred by the law from the conduct or dealing of the parties. |
| General trust. A transfer by a person of all his property to a trustee to hold as a trust fund. |
| Imperfect trust. An executory trust. |
| Implied trust. A trust which without being expressed, is raised or created by implication of law; a trust implied presumed from circumstances. |
| Inter vivos trust. A inter vivos (among the living) trust is one created and coming into existence during the life-time of the trustor. |
| Involuntary trust. A “constructive” trust. |
| Irrevocable trust. Trust agreement not susceptible of being revoked. |
| Ministerial trusts. A trust which demands no further exercise of reason or understanding than every intelligent agent must necessarily employ; also called “instrumental trust”. It is a species of special trust, distinguished from a discretionary trust, which necessarily requires much exercise of the understanding. |
| Naked trust. A dry or passive trust. A trust which requires no action on the part of the trustee, beyond turning over money or property to the cestui que trust. |
| Parol trust. A right to property created without writing by one person for the benefit of another. Sometimes the term is applied to trusts which do not come within the statute of frauds and may be proved by parol. In this sense, resulting trusts are known as parol trusts. |
| Passive trust. A dry or naked trust. A trust as to which the trustee has no active duty to perform. |
| Precatory trust. A trust created by certain words which are more like a wish or hope that a command or requirement. |
| Private trust. A trust in which the beneficial interest is vested absolutely in some individual or individuals, who are or may be definitely ascertainable. |
| Public trust. A public trust, also called a “charitable trust” is one in which the public at large, or some descriptive part of the public, have the beneficial interest. |
| Revocable trust. Trust agreement susceptible of being revoked. |
| Shifting trust. An express trust which is so settled that it may operate in favor of beneficiaries additional to, or substituted for, those first named, on specified contingencies. |
| Simple trust. A simple trust is one which corresponds with the ancient use, and arises where property is simply vested in one person for the use of another, and the nature of the trust, not being qualified by the settlor, is left to the construction of law. |
| Spendthrift trust. A trust created to provide a fund for the maintenance of a beneficiary, and at the same time to secure it against his or her improvidence or incapacity. Provisions against alienation of the trust fund by the voluntary act of the beneficiary or his or her creditors are the usual incidents. |
| Testamentary trust. A trust agreement created under the terms and provisions of a valid and uncontested will. The trust becomes effective at the time of the testator’s death. |
| Trust es delicto. Trust ex maleficio. |
| Trust ex maleficio. A species of constructive trust arising out of some fraud, misconduct, or breach of faith on the part of the person to be charged as trustee, which renders it an equitable necessity that a trust should be implied. |
| Voluntary trust. An obligation arising out of a personal confidence reposed in and voluntarily accepted by one for the benefit of another, as distinguished from an “involuntary” trust, which is created by operation of law. According to another use of the term, “voluntary” trusts are made in favor of a volunteer, that is, a person who gives nothing in exchange for the trust, but receives it as a pure gift. In this use, the term is distinguished from “trusts for value”, the latter being those trusts that are in favor of purchasers, mortgages, etc.. A “voluntary” trust is an equitable gift, and in order to be enforceable by the beneficiaries, must be complete. |
19.44.6
Express trusts
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| · | Creation No particular or technical words are necessary to create an express trust. Any language which shows with reasonable certainty an intention to create a trust, and which designates the property, the beneficiary, and the purpose of the trust, is sufficient. Under the statute of frauds, an express trust must be evidenced by writing. The most common forms used in the creation of a trust are: |
| ¨ | Declaration of trust |
| ¨ | Delivery in trust |
| ¨ | Conveyance or deed |
| ¨ | Agreement of Contract |
| ¨ | Testamentary disposition |
| After a trust is created and in force, it cannot be amended or altered without the consent of all parties in interest, except under a reserved power of amendment or alteration. |
| · | Elements The basic elements of an express trust are: |
| ¨ | The Transfer The transfer of property can be accomplished by a: |
| ? Declaration of trust and conveyance. |
| ? Conveyance |
| ? Will |
| ¨ | The Trustee In general, the trustee can be any person or entity capable of taking legal title. Some statutes require corporation to be vested with specific trust powers; and in some jurisdictions, non-individuals acting as trustees are subject to certain limitations. The trustee is generally appointed in the trust agreement. If the trust does not provide the method for the appointment of a successor trustee, in the event of death, refusal or inability to act, a court of competent jurisdiction may appoint one. |
| ¨ | Trust Property (Corpus) The subject matter of the trust must be lawful and in existence at the time the trust is created. It can be almost any interest in property. The requirements as to the description of the property conveyed are matter of conveyancing. |
| ¨ | Beneficiary In the creation of a trust, the beneficiary must be clearly and definitely designated. Any person or legal entity capable of taking an interest in real property may be a trust beneficiary. A class, if clearly defined, may be named as a trust beneficiary. A trust may also be created for a particular noncharitable purpose rather than for the benefit of a beneficiary. |
| ¨ | Purpose Unless prohibited by statute, a trust may be created for any purpose the creator desires, providing it would not be contrary to public policy. |
| ¨ | Permissible Term Unless otherwise provided by statute, the term of the trust cannot be in contravention of the rule against perpetuities. The role establishes that any created interest must vest within twenty-one years, exclusive of periods of gestation, after lives in being. The rule against perpetuities does not apply to “charitable trusts”. |
19.44.7
Separation of Legal Title and Equitable Ownersh
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| An express trust, as distinguished from a resulting or a constructive trust, involves the separation of the legal and the beneficial interest in a thing or “res”, whereby the “legal title” in the trust is held by a person, the trustee, for the benefit of another, the beneficiary, who has an “equitable interest” in the res to receive whatever benefits he is entitled to therefrom by the terms of the trust. |
19.44.8
Testamentary Trusts
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| A testator may devise property to a testamentary trust created by the terms of his own will. |
| In this situation, the will itself established the trust and sets the boundaries of the trustee’s authority. |
| The creation of any testamentary trust is dependent upon: |
| · | The death of the testator, who is also the settlor or trustee. |
| · | The validity of the will in which the trust is created. This presupposes the completion of the probate proceedings. In the event that the will is not admitted to probate during the time allowed by law, or if admitted, it is contested and set aside, the trust created by the same will be of no legal effect. It should be noted that, though not being a testamentary trust, it is possible for an “inter vivos or living trust” (previously created) to be named as a devisee under the terms of a will. Obviously, the devise being subject to the same contingencies above mentioned. |
19.44.9
Statute of Frauds in Relation to Trusts
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| The statute of frauds, provides that all creations of trusts in lands shall be manifested and proved by some writing signed by the creator of the trust, or by his last will in writing, or else they shall be utterly void. Therefore, in states, where this statute prevails, either as part of the common law or by re-enactment, trusts must be evidenced in writing, not necessarily created in writing, but their existence, if denied, must be proved by some writing. |
| However, in some other states it is provided by statue that trusts in or concerning real property must be created and declared in writing. When a trust is created by will, it is necessary for the will to have been executed and proved in accordance with the applicable state law. |
| The statue of frauds applies to public or charitable trusts, as well as to private, although it does not apply to resulting or constructive trusts. |
19.44.10
Powers of the Trustee
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| · | Source of the Trustee’s Powers |
| ¨ | The trust declaration. |
| ¨ | The state statutes. |
| · | Interpretation of Powers |
| ¨ | The trust terms may expressly or impliedly define the trustee’s powers. |
| ¨ | Additionally, and when necessary, the law (statutory or decisional) will infer complementary powers from the trust instrument as a whole or from the general law. |
| · | Power to Sell, Lease, or Mortgage Real Property |
| ¨ | Power of Sale Normally, a power of sale of any trust asset is found in the trust instrument. If not expressly given, a power may be inferred from the trustee’s inherent duty to make trust assets productive, unless there is a specific prohibition against a sale. An intention not to sell property may also be inferred from the trust instrument, as well as from the surrounding circumstances and the stated purpose of the trust. Company approval must be obtained prior to issuance of a policy based on an implied trust power. In the absence, however, of an express or implied power to sell, a trustee has usually no power to sell, without an order of a court of competent jurisdiction. Authority to sell or encumber cannot be inferred from a power merely to manage trust property and distribute income. |
| ¨ | Power to Lease Normally, a power to lease any trust asset is found in the trust agreement. All, of the above considerations in relation to “power of sale” are also applicable to “leasing power”. It should be added, that in all lease cases there is a question as to whether the trustee has power to lease any trust asset beyond the period of duration of the trust. In this respect, court opinions seem to be divided. |
| ¨ | Power to Encumber Noncharitable Trust Without Ascertainable Beneficiary If a trust is created for a particular noncharitable purpose rather than for the benefit of a beneficiary, trust property must only be used for the intended purpose of the trust unless there is excess property as determined by a court. |
19.44.11
The Trustee Dealing With Itself
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| A trustee cannot, in its fiduciary capacity, deal with itself in its individual capacity. |
| The trustee cannot take part in any transaction concerning the trust in which the trustee has interest adverse to that of the trustee’s beneficiary without permission of the beneficiary after full disclosure. Neither can the trustee convey or mortgage trust property to itself or to its spouse. |
| Company approval must be obtained prior to issuance of a policy involving self dealing. |
19.44.12
Termination of a Trust
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| · | Where the instrument creating a trust does not prohibit the termination thereof, a trust may be terminated. |
| ¨ | By agreement of all parties in interest. |
| ¨ | By the concert of the beneficiaries without judicial action. |
| ¨ | By the trustor through the exercise of a previously reserved power of revocation. |
| · | By judicial determination that the trust was improperly created, its purpose is unlawful or it is impossible to be carried out. |
| · | By operation of law. |
| · | By the terms of the trust: |
| ¨ | Expiration of the term or duration. |
| ¨ | Occurrence of some event. |
19.44.13
Effect of Termination
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| The effect of the termination of a trust is to bring to a conclusion the separation of legal title and equitable ownership, the title, corpus and principal, including accumulations of income, passing to the beneficiaries entitled to it. It is the duty of the trustee to pay or turn over the estate to them and make a conveyance to them where conveyance is necessary to clear the legal title. |
19.44.14
Effect of Voidance
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| Where there is a clear intention to create a trust, but the trust is void for any reason, either no title passes, or a resulting trust remains in favor of the grantor, since a trustee takes only such estate as is necessary to carry out the trust. However, if consideration passed, then the trustee holds under a resulting trust for the person who paid the consideration. |
19.44.15
Recommended Forms of Vesting of Title
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| · | Inter vivos or Living Trusts __________________, trustee under the (declaration of trust) (trust agreement) dated ________________, made by ____________, settlor, (for the benefit of __________________), (and recorded in Book ________, Page _____. |
| · | Testamentary Trusts ___________________, trustee under the trust created by the last will and testament of _________________, deceased, and recorded in Book ________, Page _____. |
19.44.16
Examination of an Inter vivos or Living Trust
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| Items to be considered when examining an inter vivos or living trust. |
| · | Is the date of commencement of the trust clearly defined? |
| · | Did the settlor or trustor have physical, mental and legal capacity at the time of the creation of the trust? |
| · | Has the trust been properly created? Are there any special statutory requirements relative to the creation of a trust? |
| · | Property or corpus: |
| ¨ | Did the settlor own the property at the time of the creation of the trust? |
| ¨ | Did the settlor have fee simple title to the same? |
| ¨ | How was it conveyed into the trust? Were all the statutory conveyancing requirements or rules complied with? |
| ¨ | Was the property acquired subsequently by the trustee? |
| ¨ | Is this a valid conveyance? |
| · | Was a trustee appointed? Was a co-trustee appointed? Was a successor or contingent trustee appointed? |
| · | Does the trustee qualify under state law? The co-trustee? The successor or contingent trustee? |
| · | Are the powers of the trustee express powers? (Do not rely on implied powers) |
| · | Are there prohibitions or limitations in relation to the trustee’s powers? |
| · | If any trustee’s power is discretionary, has any successor or contingent trustee been appointed? |
| · | Is there any possible violation of the rule against perpetuities? |
| · | Is there any possible violation of the rule against illegal restraint on alienation? |
| · | The purpose of the trust, |
| ¨ | Is it illegal? |
| ¨ | Does it violate public policy? |
| ¨ | Does it violate state law? | ||
Is it created for a particular noncharitable purpose rather than for the benefit of a beneficiary? |
| · | Do the beneficiaries qualify as such under state law? |
| · | Is the trust a charitable trust? |
| · | Is the trust a dry trust? |
| · | Has the trust been amended, modified or revoked? |
| · | Has the trust been terminated? Is it still in force and effect? |
| · | Does the trust instrument need to be recorded in accordance with state law? |
| · | Is the trustee executing a lease that will extend beyond the period of duration of the trust? Is this action authorized by the trust instrument? |
| · | Has the Company been asked to affirmatively insure that the transaction is within the powers of the trustee? |
| · | Are all the provisions of the trust being complied with? |
| · | Is it necessary to obtain the consent of the beneficiaries? |
19.44.17
Examination of a Testamentary Trust
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| In addition to those items set forth at 19.44.16, the following items must be considered when examining a “testamentary trust”: |
| · | Date of death of the testator. |
| · | Has the will been admitted to probate? |
| · | Are the probate proceedings still pending? |
| · | Has state law been fully complied with in regard to the probate proceedings? |
| · | Is the property free and clear of taxes, claims, allowances, etc.? |
| · | Does state law make any special provision in regard to testamentary trust? |
| · | Has the will been properly recorded? |