Trusts

Question 1

A Trust

Answer 1

A fiduciary relationship with respect to specific property wherein:

1. A trustee holds legal title to the property subject to the equitable rights of the beneficiary.
2. Creator is settlor who must have the INTENT to create the trust.
3. Trust must have valid purpose.
4. No consideration required.

Question 2

Express Private Trust: Settlor with Capacity and Present Intent to Create a Trust

Answer 2

1. Must intend trust to take effect immediately.
2. Must express intend by words or conduct while settlor owns the property.
3. Precatory expressions (hope, wish, suggestion) result in inference that NO trust was intended, but inference MAY be overcome by other evidence.

Question 3

Express Private Trust: Trustee

Answer 3

1. Failure to name a trustee (or failure of trustee to accept or qualify) does NOT defeat a testamentary trust; court will appoint trustee.
2. Inter vivos trust will fail without a trustee because there can be no valid delivery and transfer of trust property.
3. Trustee must have duties.
4. Settlor may declare himself trustee.

Question 4

Express Private Trust: Trust Property (Res)

Answer 4

1. Property may be of any type, including future interests.
2. Must be property that settlor has the power to convey.
3. Must be described with certainty.

Question 5

Express Private Trust: Beneficiaries

Answer 5

1. Must be capable of taking and holding title to property.
2. Must be definite (susceptible of identification when their interests come into enjoyment)(e.g., ‘friends’ is not sufficient);
3. Notice not required but beneficiary must accept; acceptance is presumed.

Question 6

Express Private Trust: Valid Trust Purpose

Answer 6

1. Trust or provision must not be: (i) illegal; (ii) impossible to achieve; (iii) contrary to public policy; or (iv) intended to defraud settlor’s creditors based on illegal consideration.
2. Effect of invalid condition subsequent—condition stricken, but trust valid.
3. Effect of invalid condition precedent—condition stricken, but Court decides if trust is valid.

Question 7

Express Private Trust: Intervivos Trust

Answer 7

Created during settlors lifetime:

1. Declaration of trust by property owner that he holds in trust, or
2. Transfer of property by settlor to the trustee.

No writing required UNLESS trust of land.

Question 8

Express Private Trust: Testamentary Trust

Answer 8

Created by will.

1. Essential terms must be ascertained from will, incorporated document, facts of independent significance, or exercise of power of appointment.
2. Secret trust (appears as an absolute gift, but a trust is intended)—constructive trust is imposed.
3. Semi-secret trust (gift is in trust but without beneficiary)—results in a trust for T’s heirs.

Question 9

Charitable Trusts

Answer 9

1. Purpose must benefit the public.
2. Must have indefinite beneficiaries.
3. May be perpetual
4. Enforceable by AG, not private parties.
5. Cy Pres: If settlor’s intended purpose is impracticable, unlawful, or wasteful, court substitutes new charitable purpose: (i) must find settlor had general charitable intent, not just interested in the named charity; (ii) Court will select another purpose as near as possible.

Question 10

Honorary Trusts

Answer 10

1. Not for charitable purpose, but no private beneficiaries who can enforce (for pets, graves, etc.)
2. Not enforceable, but trustee may choose to carry it out.
3. If Trustee does not carry it out, resulting trust imposed for settlor’s estate.

Question 11

Beneficiary’s Equitable Interest is Alienable

Answer 11

Beneficiary may voluntarily transfer interest in trust, and his creditors may levy on his interest.

Question 12

Spendthrift Trust

Answer 12

1. Spendthrift trust provides that beneficiary may not voluntarily or involuntarily transfer his interest (i.e., cannot sell or give away interest, and creditors cannot reach it).
2. Not valid if settlor is also a beneficiary.
3. Dependents, government, those supplying necessities may be able to reach protected interest.

Question 13

Discretionary Trusts

Answer 13

Trustee has discretion to pay or withhold income or principal.

1. The interest in the trust cannot be reached by creditors BEFORE trustee decides to make a discretionary payment.
2. After the trustee elects to make payments, must pay creditors directly if he has notice, unless there is a spendthrift provision.

Question 14

Support Trust

Answer 14

A support trust cannot be assigned OR reached by creditors EVEN WITHOUT a spendthrift clause.

Question 15

Modification and Termination: By Settlor

Answer 15

1. Must reserve right to revoke or modify (under UTC, trusts are presumed to be revocable).
2. Power to revoke includes the power to MODIFY.

Question 16

Modification and Termination: By Beneficiaries

Answer 16

May terminate or modify if:

(i) All beneficiaries consent (watch for remote UNBORN beneficiaries); AND
(ii) It will not interfere with a material purpose. Examples of purposes precluding termination: distribution at a specific age, preserving property for remainderman, protecting beneficiary from own poor judgment.

However, joinder with settlor removes material purpose issue. Cannot remove spendthrift without settlor consent.

Question 17

Modification and Termination: By Court

Answer 17

1. May terminate if (a) trust purposes accomplished; or (b) become illegal or impossible.
2. May modify if changed circumstances make compliance incompatible with trust purpose.

Question 18

Trust Administration: Power of Trustee

Answer 18

1. Power to sell and lease unless limited by trust instrument.
2. Power to incur expenses—necessary and ordinary management expenses, but power to improve property usually not inferred.
3. Power to borrow money must be GRANTED in trust instrument.

Question 19

Trust Administration: Duties of a Trustee: Duty of Care

Answer 19

Duty of Care: standard is that of a reasonably prudent person managing own property.

Question 20

Trust Administration: Duties of a Trustee: Duty of Loyalty

Answer 20

Duty of Loyalty means no self-dealing. Specifically:

1. Cannot buy assets from or sell assets to the trust
2. Cannot borrow from trust or loan to trust
3. Cannot personally gain through position
4. Corporate trustee cannot buy (but may retain) own stock

If the duty is breached, beneficiary may:

1. Set aside transaction
2. Recover profit; or
3. Ratify transaction.

Settlor can waive self-dealing transaction.

Question 21

Trust Administration: Duties of a Trustee: Duty to Separate Trust Property

Answer 21

May not commingle trust property with own property, or any other trusts (or third party’s) property.

1. Commingled property lost or destroyed is presumed to be trustee’s
2. If portion of commingled assets increases in value, presumed to be TRUST assets.
3. If a portion of commingled assets declines in value, presumed to be trustees.

Question 22

Trust Administration: Duties of a Trustee: Duty to Perform Personally

Answer 22

May not delegate administration of trust.

Question 23

Trust Administration: Duties of a Trustee: Duty to Preserve Property and Make it Productive

Answer 23

Investments must be prudent; trustee must use reasonable care, skill, and caution.

a. Trustees with special skill held to higher standard.
b. Trustee must diversify investments.
c. Investment decisions may be delegated if a prudent trustee would do so.

Prudence evaluated in terms of overall strategy.

Question 24

Trust Administration: Trustee’s Liability

Answer 24

1. Liable to beneficiaries for breach of trust (surcharge action)
2. Losses from one breach may NOT be offset from gains from another
3. Defenses: laches or express/implied consent to the breach by the BENEFICIARY
4. Exculpatory clauses relieving a trustee of all liability OR liability for bad faith, intentional breach, or recklessness are void.
5. Trustee liable to third parties for contracts and torts, but usually entitled to indemnification.

Question 25

Trust Administration: Allocation of Receipts and Expenses: Uniform Principle and Income Act (“UPAIA”)

Answer 25

1. Trustee must administer trust impartially; must be fair to all beneficiaries.
2. Distribute interest and dividend income to income beneficiary; if such distribution does not effectuate trust purpose and is unfair, trustee may adjust between principal and income.
3. Receipts
   a. Income: rental income, interest on bond or CD, money received from entity, liquidating assets and mineral assets 10% rule.
   b. Principal: proceeds of sale of asset, eminent domain awards, capital gains, property other than money received from entity., insurance proceeds where trust is beneficiary; liquidating assets and mineral rights 90% rule.
4. Expenses
   a. Income: 50% trustee and consultant comp; 50% accounting and legal expenses; and ordinary expenses

b. Principal: 50% trustee and consultant comp; 50% accounting and legal expenses; and principal payments on debt; environmental costs.
b. Principal

Question 26

Will Substitutes: Revocable Trusts

Answer 26

1. Interest passes during life but becomes possessory at death.
2. Pour-over from will to revocable trust:
   (a) Trust may be established before, concurrently with, or within 60 days after execution of the will;
   (b) Trust may be amended and revocable
   (c) Gift is valid even if trust unfunded during the settlor’s lifetime.

Question 27

Will Substitutes: Life Insurance Trusts

Answer 27

1. Contingent beneficiary trust allowed (i.e., proceeds to A, but if A does not survive, to B in trust for my children)
2. Assignment of policy trust allowed (assign policy to party to hold in trust).

Question 28

Will Substitutes: Totten Trust Bank Accounts

Answer 28

For bank accounts.

1. Trustee-depositor has full rights during lifetime.
2. Revoked by withdrawals, any other lifetime act indicating intent to revoke.
3. Subject to depositor’s creditors’ claims.
4. Automatically terminates of B predeceases T.

Question 29

Resulting Trusts

Answer 29

1. Purchase money resulting trusts: Person taking title did not supply consideration; sole duty is to convey title to one furnishing consideration. (no resulting trust presumption where parties closely related).
2. Failure of express trust: resulting trust arises with settlor as beneficiary.
3. Excess corpus: If trust property remains after purpose fulfilled, resulting trust for settlor arises.

Question 30

Constructive Trusts

Answer 30

This is an equitable remedy to prevent unjust enrichment.

Applicable to:

1. Theft or conversion
2. Fraud, duress, undue influence, mistake, or interference with K relations
3. Breach of fiduciary duty
4. Breach of fraudulent promise, promise by one in confidential relationship, promise concerning will or inheritance, promise to forgo foreclosure bid.

Question 31

Pour Over Will From Trust

Answer 31

T can make gifts by will to a revocable and amendable trust that was executed before, concurrently, or within 60 days after the execution of the will and is validly identified in the will.