Trusts are a central component of my practice; I use them for asset protection, estate planning and to hold portfolios I manage as an investment adviser. If you have any questions about my services, please call me at 832.330.4101.
“A trust is created only if the settlor properly manifests an intention to create a trust relationship.”
The Restatement of Trusts’ definition contains three key words: properly, manifest and intention. The Merriam-Webster online dictionary defines each in the following way:
To paraphrase the Section 4 of the Restatement of Trusts utilizing these definitions: the grantor must utilize an accepted form of documentation or communication to publicly demonstrate his desire to form a trust.
The most accepted means of proving intent is to have an attorney draft a trust document. But this is not the only method. Last week, I wrote that in Texas as few as 14 words placed on certain document’s beneficiary form can create a trust. The key in those cases was the specific naming of a trusted individual such as a sister or wife and describing them as a “trustee.” And section 407 of the Uniform Trust Code provides rules for proving an orally created trust – which is certainly not the advised method of showing intent.
There are two policy reasons why a grantor must intend to create a trust. First, the creation of a trust fundamentally changes the nature of the grantor’s relationship with the trust property. For example, after creating the trust, the grantor can no longer do as he pleases with the contributed property, but must instead act in the best interest of the beneficiary. Second, there may be gift and/or estate tax implications, depending on the nature of the trust, the amount of property contributed and the beneficiary.
This issue is seldom litigated.
If you have a question about a current contract, or need a a contract drafted for a specific purpose, please call us at 832.330.4101.
Imagine the following series of events: you contact a business owner to perform a service for your company. You two engage in series of communications, each asking the other to specify what exact services to provide and their cost. Suddenly the provider arrives at your office to begin work, thinking the two of you have agreed on terms. You tell him you’re not done negotiating while he says he’s ready to go. He eventually leaves but sues you for breach of contract, leaving you with the possibility of a large legal bill.
Did you inadvertently form a contract? The answer lies in whether negotiations led to a “meeting of the minds,” also referred to as a “manifestation of mutual assent.” Unfortunately, the Second Restatement of Contract’s definition is less than satisfying: “Manifestation of mutual assent to an exchange requires that each party either make a promise or begin to render performance.” Several early Texas cases contain a better definition: “The assent must comprehend the whole of the proposition; it must be exactly equal to its extent and provisions, and it must not qualify them by any new matter.”
A brief primer of contract formation will clarify. Contract negotiations occur over a strict series of events. The offeror makes an offer that contains the complete terms of the proposed contract (this makes him the “master of his offer”). If the offeree accepts the terms, a contract is formed; if the offeree responds with new terms and conditions, he has rejected the first offer and made a counter-offer, which turns the original offeror into an offeree. The process now repeats itself until one party stops adding news terms and conditions and consents to the proposed terms; this is the exact moment when a “meeting of the minds” or “manifestation of mutual assent occurs.
A very old Texas case illustrates this point. In the summer of 1854, a west Texas store-owner named S.H. Summers mailed an offer to purchase certain items from Boston wholesaler Whitney, Fenns, Shaw & Co.. Later in the summer, Whitney shipped goods to Summers, indicating they believed they formed a contract for sale. But Whitney also sent Summers a letter that contained the following key paragraph:
We take much pleasure in handing you invoices for goods ordered, which we have shipped per bark Helen, which we trust will arrive safely and in due season, and give perfect satisfaction. She is to sail very soon. Please notice that we have insured the goods to Houston only, which we trust will be agreeable to your wishes. The gentlemen's gauntlets we were entirely unable to find in our market; also the white kerseys, which are not now made here. We send you a case of Georgia plains, at the agent's price, which, we have no doubt will please you. We were in doubt whether you wanted bleached linen thread or white brown, and have therefore sent you a small quantity of each. Please return us your notes payable in six months, and if agreeable, at the office of R. &. D. G. Mills, Galveston, with exchange. If you want longer time please add the interest after six months, and make them as short as you can conveniently meet them.
Whitney doesn’t have several items Summers requested and therefore included substitute goods that may be unacceptable. The letter also contains specifications for the method of payment, another key contract term, along with place of delivery. The addition of numerous terms and conditions led the Supreme Court of Texas to rule the parties did not form a contract.
This example is bit extreme by modern standards; in the current business environment, a return email or phone call could have cleared up the issue within a few hours or minutes. But it does provide an excellent example of a situation where the offeree makes a counter-offer instead of accepting the proposed terms and conditions thereby forming a contract. And it also illustrates a key point of contract negotiations: always know where you are the in the process. And if you’re unsure, you can always clarify your position by simply saying, “we haven’t formed a contract yet.”
The following post is based on the following case: Buxani v. Nussbaum, 940 S.W.2d 350 (Tex.App.-San Antonio, 1997)
If you have a question or concern about a current or proposed contract, please call us at 832.330.4101
The Buxanis, who owned a jewelry store, hired Nussbaum to remodel the shop. The original contract contained a provision that any new work required written documentation. During construction, the Buxanis asked Nussbaum to add additional modifications. After informing the Buxanis of the additional cost -- which they agreed to pay -- Nussbaum did the work. This second contract was never written. When Nussbaum asked for payment, the Buxanis refused, forcing Nussbaum to sue. Nussbaum won at trial; the court ruled the parties formed a second oral contract.
The Buxanis appealed, arguing that the oral contract lacked mutual assent, one of 5 elements required in Texas for contract formation. The appellate court based their affirmation of the lower court’s ruling on the following doctrine:
When the court files findings of fact which include some elements but omit unrequested elements essential to a ground of recovery, the omitted findings will be presumed to have been found in support of the judgment if those presumed findings are supported by evidence in the statement of facts.”
The appellate court found the information in the trial record and ruled accordingly.
While the appellate court’s reasoning was the simplest way to establish mutual assent, another existed that combines common law with trial testimony. Texas law defines mutual assent in the following manner: “To make a contract there must be a mutual assent. The assent must comprehend the whole of the proposition; it must be exactly equal to its extent and provisions, and it must not qualify them by any new matter.” And according to §19 of the Restatement of Contracts, conduct can prove a party’s assent. Here, counsel could compare the totality of the work done with the written contract’s terms to show the content of the oral contract. Nussbaum’s conduct that differed from that specified in the written contract would prove his acceptance of the new terms and conditions.
But regardless of the legal jiu-jitsu to prove the oral contract at trial, a second written contract may have either prevented litigation completely or greatly reduced the cost of litigation by providing a document all parties could use to show the terms and conditions agreed to. And as a practical matter, that is the lesson to take from this case: a well-written contract upfront can prevent costly litigation down the road.
 Texas contract law requires the following five factors to be a valid contract: (1) an offer, (2) an acceptance in strict compliance with the terms of the offer, (3) a meeting of the minds, (4) each party's consent to the terms, and (5) execution and delivery of the contract with the intent that it be mutual and binding.
 Mutual assent is the event where contract negotiations change into a viable contract.
 Browne Grain Co. v. Walker, 206 S.W. 859 (Tex. App. - Amarillo [7th Dist.], 1918)
The Restatement of Trusts and Texas Trust Code describe 5 ways to create a trust: 1.) The grantor declares he’s the trustee over certain property, 2.) The grantor makes an inter vivos transfer of property to a trustee, 3.) The grantor makes a testamentary transfer of property to a trustee, 4.) The Grantor uses a power of appointment to transfer property to a trustee and, 5.) The grantor promises to create a trust, and the promise creates some type of enforceable rights. The Uniform Trust Code includes all the above methods, save for making a promise with enforceable rights.
Conspicuously absent from these treatise is any guidance detailing what documentation is required, leaving that to state law. Texas’ requires only that the property, object and beneficiary be clearly ascertainable in the available documents. Several cases are illustrative. The grantor in Barrientos v. Nava wrote the following in the beneficiary section of a Blue Cross/Blue Shield life insurance contract: “Barbara Nava Barrientos “Trustee for minor children Tyler & Brooke Nava Children 7-17-92 Tyler 2-16-94 Brooke.” The court ruled these 14 words and 2 birthdays were sufficient to prove the existence of a trust. Describing an individual as a trustee on a life insurance beneficiary form strongly implies the policy’s proceeds would supply the trust property while the person described as a trustee would perform that role. Finally, the beneficiaries were clearly named and further clarified by including each child’s birthday.
A similar fact pattern occurs in Tomlinson v. Tomlinson, where the granter added the following information to his profit sharing plan’s death benefits: “Richard Lee Tomlinson II, Rileigh William Tomlinson, Trustee Lynn Tomlinson.” Richard Lee and Rileigh William were the grantor’s sons while Lynn Tomlinson was the grantor’s wife. As in Barrientos, the grantor in Tomlinson provided sufficient information to determine the trust property, the trustee and the beneficiaries, allowing the court to rule a trust existed.
While Barrientos and Tomlinson dealt with language written on a death benefit, Davis v. Gayer involved the following language written on a deed: “Jim Gibson, Trustee for two (2) minor children, James R. Gibson, II and Adrian L. Gibson." The court ruled these words provided sufficient information to determine the trust property, beneficiaries and object. While the trust’s purpose was not directly stated, the court cited additional case, noting, “If a trust is set up for minor children, it is reasonable to conclude that the trust was intended for the general welfare of the children.”
Why would a court rule that such minimal information was sufficient to establish the existence of a trust? Doesn’t the court want additional information and documentation? Of course they do; such a small amount of detail about the trust does nothing but invite conflict and ultimately, litigation. But consider the words used in the above three cases, where the grantor specifically names a person and then added the word “trustee” after their name. In all three cases, the word “trustee” is an “appositive” -- a noun placed after another noun for the express purpose of explaining or further identifying the first noun. Describing the person as a “trustee” leaves little room for debate as to what they’re role is. Furthermore, including the names of the grantor’s children in the same bequest strongly implies they are the beneficiaries. In all these cases, the Texas Trust code fills in the holes left by the lack of any writing.
Given the information and the wording in each of these cases, it’s difficult to argue the grantor wanted to do anything except create a trust. While it’s always better to write a complete trust document, it’s good to know that, if necessary, as few as 14 words written on certain documents can create a trust.
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