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Professional Responsibility
Temple University School of Law
Meyers, Eleanor W.

Professional Responsibility – Integrated Transactional Program
Prof. Myers – Spring 2010
 
POINTS TO REMEMBER: 
 
I.                    BE SPECIFIC
a.       Make sure to list out:
                                                               i.      Who you are going to talk to
                                                             ii.      What you are going to say
1.       Consent or counsel or withdrawal
                                                            iii.      Whether you will get consent – and to what
b.      Start with the problem – not the rules
                                                               i.      What is the problem – how will you solve it
1.       Refer to the rules to help you solve it
c.       Focus here is on Counseling
II.                  Site the Rule #s
a.       Don’t have to quote the rules but apply them correctly and site the #
b.      You may also refer to comment language
                                                               i.      Comment X makes it clear that . . . – don’t quote just paraphrase
III.                Know the cases
 
TRUSTS & ESTATES:
 
I.                    TRUST LAW
a.       Creation
b.      Content
                                                               i.      Objectives
                                                             ii.      Tools to accomplish the objectives
c.       Modification & Termination
                                                               i.      Amendments
                                                             ii.      Revocation – not revocable unless explicitly reserved
                                                            iii.      Cy pres
 
II.                  CHARITABLE ORGANIZATIONS
a.       Charitable Trust –
                                                               i.      Does not need an ascertainable beneficiary to be valid
1.       Rule Against Perpetuities (RAP) does not apply to charitable trusts
                                                             ii.      Must have a “charitable purpose”
1.       Must be charitable – not just benevolent
2.       Charity must be for benefit of an indefinite number of persons
a.       Cannot name a specific beneficiary – must be public
b.      Must be for indefinite number of people – may end up being a small group but must be indefinite
3.       Charitable purposes include: relief of poverty, advancement of education, advancement of religion, promotion of health, gov’t or municipal purposes and other purposes beneficial to the community
4.       Shenandoah Valley National Bank v. Taylor – gift to school children at local school not valid charitable purpose – given right before holidays and no way to control how children spend money – so not an educational trust
5.       If does not have valid charitable purpose then fails for violating the RAP
a.       If has a valid charitable purpose then may endure forever – exempt from the RAP
                                                            iii.      Cy pres – if the settlor’s exact charitable purpose cannot be carried out the court may direct the application of the trust property to another charitable purpose that approximates the settlor’s intentions
1.       As close as possible – some purpose that’s as close to original as possible once the original purpose is no longer viable
2.       March of Dimes – eradicate polio – moved to birth defects
3.       Restatement and Uniform Trust Code also allow use of cy pres when “wasteful” – some disagreement about this
                                                           iv.      RAP – being phased out – eliminated in DE, PA, NJ
1.       Encourage wealthy families to create dynasty trusts
2.       w/o RAP – Shenandoah case would have come out differently
b.      Not-for-Profit Corporations –
                                                               i.      Differences from Trust:
1.       Trust – interest held by one person to benefit another
2.       Corporation – body formed and authorized by law to act as a single person and legally endowed with various rights and duties
3.       Each state has separate laws to establish trusts and corporations – but most are very similar from state to state
a.       All states regulate trusts and corporations differently
4.       It is easier to create a trust – less formal
a.       To create a trust –
                                                                                                                                       i.      Execute a trust agreement –
1.       Name original trustees
2.       State charitable purpose of trust
3.       Establish guidelines for administration and distribution
4.       Name successor trustees or establish process to select successor
5.       State the duration of the trust or how long it will exist
b.      No or minimal requirements for regular meetings, state filing, officers, or other forms of record-keeping and accountability
c.       Not required to file annual reports
d.      May still go through such formalities to safeguard
5.       Corporations – more formal
a.       To create a corporation –
                                                                                                                                       i.      File articles of incorporation w/ Sec. of State
1.       Name
2.       Purpose of corp.
3.       Name and address of registered agent
4.       Name and address of incorporators
5.       Provision for distribution of assets on dissolution
6.       Process to amend articles
                                                                                                                                     ii.      Draft bylaws
1.       Covers major actions and functions
a.       If there will be members (usually not)
b.      Number of directors and how chosen, removed, successors
c.       Title and number of officers – how selected, removed and succeeded
d.      Indemnification of officers and directors
e.      Procedures to amend
2.       Can use resolutions for more specific details
                                                                                                                                    iii.      Need an initial meeting to organize 
1.       Elect directors
2.       Elect officers
3.       Adopt bylaws
4.       Adopt resolutions (bank accounts, etc.)
b.      Should have regular meetings with minutes
c.       State filings, and other reporting requirements
d.      Rigorous records help maintain tax exempt status if challenged
e.      Annual reports
6.       Protection from personal liability to corporate directors of not-for-profit corporations
a.       Not as much protection for trustees
7.       Corporate form is more flexible
a.       To amend charitable trust must get court approval in some states while others require creator to submit special notice
b.      Corp can change through bylaw amendments
c.       Replacing a trustee or providing for successors can be difficult
                                                                                                                                       i.      May be restrictions on delegation
                                                                                                                                     ii.      May be able to employ agents
                                                                                                                                    iii.      Usually cannot delegate discretionary authority – investment/grant making decisions
d.      Bylaws usually govern how directors are selected
8.       In many states corps can indemnify officers and directors in some circumstances
a.       Laws on indemnifying trustees are less clear
9.       Trustee is held to higher fiduciary standard
10.   Tax consequences are similar
a.       Exception – unrelated business income
                                                                                                                                       i.      Corp – tax will generally be higher than a trust
c.       Purpose to create a charity –
                                                               i.      Altruism
                                                             ii.      Tax benefits
1.       Income is exempt from taxation
a.       Federal income tax, state and local income, property and sales tax – varies by state
b.      Does not apply to unrelated business income
2.       Contributions to the organization are deductible by the donor
a.       Only if you itemize
b.      Deductible amount is difference b/w donation and gift in return
c.       Encourage people to give to charity
                                                                                                                                       i.      Must prove it is a charity
d.      Must be a § 501(c)(3) corporation – subset of not-for-profits to have contributions be deductible – to become a 501(c)(3):
                                                                                                                                       i.      No private inurement – salaries must be reasonable
                                                                                                                                     ii.      Must be a public purpose that fits one of the 501(c)(3) categories

                                                                                                                          ii.      Can be specific about level of support or leave “support” to the discretion of the trustee
                                                                                                                                    iii.      May be an educational support trust – provide for the educational needs of the beneficiary
1.       Again the settlor may be specific or leave to trustee’s discretion
c.       With either standard the trustee is still accountable to the beneficiaries – is some oversight
                                                                                                                                       i.      Court will not substitute their judgment for the trustee’s as long as the trustee acted in good faith with proper motives, and within the bounds of reasonable judgment
                                                                                                                                     ii.      Beneficiaries can sue for breach of duty (and some harm)
                                                                                                                                    iii.      Can also sue for not meeting standard – ex. If it is a support trust can sue for not meeting support standard
                                                                                                                                   iv.      Can a creditor stand in beneficiary’s shoes and sue?
1.       R.3d – yes creditor can stand in shoes
2.       Uniform Trust Code – no unless child support or alimony
                                                           iv.      Spendthrift Trust –
1.       Prohibition on transferability – to prevent beneficiary from spending irresponsibly
2.       To be a spendthrift trust there must be an express spendthrift clause
a.       “beneficiary may not transfer their interest”
3.       Beneficiary cannot voluntarily alienate their interest and creditors can’t reach that interest
a.       Even if the trust provides for mandatory payments
b.      Beneficiary’s only right is to sue for breach of duty
4.       Creditors may only reach what the beneficiary may voluntarily reach – creditors stand in the shoes of the beneficiary – since the beneficiary can’t accelerate payments neither can the creditor
a.       So it is difficult for a creditor to get anything under a spendthrift trust b/c cannot make the trustee write the check to them
5.       Scheffel – even in criminal case spendthrift trust provision prevents creditors from reaching trust assets –
a.       always look to the statute first – if the legislature has spoken about what the exceptions are – then the courts won’t make additional exceptions
                                                                                                                                       i.      exceptions in statute – beneficiary is also settlor, or assets were fraudulently transferred to the trust
6.       Creditor Exceptions – creditors who can reach spendthrift trusts:
a.       Children with child support orders – majority rule – Shelley
b.      Also generally alimony orders – Shelley
c.       Tax collectors – public policy exception
d.      Creditors who furnished necessities to the beneficiary – medical, shelter, food, etc.
                                                                                                                                       i.      Not a universal exception – but common
e.      Some states provide a % payment that can be ordered paid to creditors – ex. 10-30%
7.       Most difficult trust for creditors to reach – discretionary trust with spendthrift clause