Trusts, Alienability, and the Rule Against Perpetuities - Jan. 31

Question 1

What is a trustee? (Barros)

Answer 1

The trustee is the legal owner of the assets held in trust. (171)

Question 2

What is a beneficiary? (Barros)

Answer 2

The beneficiaries are the equitable owners of the assets. (171)

Question 3

What are the two basic fiduciary duties? (Barros)

Answer 3

The two basic fiduciary duties are the duty of loyalty and the duty of care. (172)

Question 4

What is duty of loyalty? (Barros)

Answer 4

Duty of loyalty makes the interests of the beneficiary paramount. The trustee must place the beneficiary’s interests above her own. The duty of loyalty prevents, among other things, self-dealing—the trustee, for example, cannot have the trust purchase an asset that she owns. (172)

Question 5

What is duty of care? (Barros)

Answer 5

The duty of care requires the trustee to act in a careful and professionally prudent manner. These duties are strictly enforced, and courts take breaches of fiduciary duties very seriously. (172)

Question 6

What is a settlor? (Barros)

Answer 6

A settlor is the person who creates a trust. (172)

Question 7

What is the rule against perpetuities? (Barros)

Answer 7

“No interest [subject to the Rule] is good unless it must vest [in a closed class], if at all, no later than 21 years after some life in being at the creation of the interest.” (175)

An interest is valid only if it must vest or fail within 21 years after some life in being at the creation of the interest (Eason - Jan. 31)

Question 8

What does the rule aginst perpetuities apply to? (Barros)

Answer 8

It applies to: Contingent remainders, Executory Interests, Vested Remainders in an Open Class, Option and similar contracts. (175)

Question 9

What does the rule against perpetuities not apply to? (Barros)

Answer 9

It does not apply to:

Future interests created in the grantor: Reversions, Possibilities of Reverter, Rights of Entry

Vested interests not in an open class created in the grantee: Indefeasibly Vested Remainders, Vested Remainders Subject to Divestment (175)

Question 10

How does the rule against perpetuities further the alienability of property? (Barros)

Answer 10

The Rule aids alienability by limiting the amount of time for the contingencies in contingent remainders and executory interests to resolve themselves, and for the open classes in vested remainders in an open class to become closed. It also aids alienability by destroying interests that do not comply with the Rule. (176)

Question 11

What is the dead hand issue? (Barros)

Answer 11

Problems might arise when a person tries to control land or other assets after their death. (176)

Question 12

How do we apply the rule against perpetuities? (Barros)

Answer 12

To apply the Rule, we

(1) Classify the future interests created by the grant without regard to their validity under the Rule.

(2) See if any of these interests are subject to the Rule.

(3) Test those interests to see if they vest or fail in a closed class within the perpetuities period. If they do, they are valid. If they do not, they are void.

(4) If any of the interests are invalid under the Rule, we reclassify the valid interests created by the grant. (177)

Question 13

What are the two major ways to test whether an interest satisfies the rule against perpetuities? (Barros)

Answer 13

The common-law approach and the wait-and-see approach. (177)

Question 14

What is the common-law approach? (Barros)

Answer 14

The common-law approach looks forward from the time an interest is created and asks whether the interest is certain to vest or fail in a closed class within the perpetuities period. (177)

Question 15

What is the wait-and-see approach? (Barros)

Answer 15

Rather than looking forward from the date of creation of the interest, this approach waits to see how facts actually develop. It looks backward at the end of the perpetuities period and asks whether the interests in question have vested or failed in a closed class. Any interest that satisfies the common-law approach will also satisfy the wait-and-see approach: if we have proved with certainty that the interest will vest or fail in a closed class during the perpetuities period, we don’t have to wait and see how things actually turn out. (177)

Question 16

What happens to an interest that violates the rule against perpetuities? (Barros)

Answer 16

An interest that violates the Rule is void from the time of the grant—we treat it as if it never existed in the first place. (179)

Question 17

What is an option? (Barros)

Answer 17

A purchase option gives the holder the right to purchase the property in question in accordance with the terms of the option agreement. (187)

Question 18

What is a right of first refusal? (Barros)

Answer 18

A right of first refusal gives the holder the right to purchase the property in accordance with the terms of the agreement, but only if the owner offers to sell the property to someone else first. (187)

Question 19

What are the two basic categories of waste? (Barros)

Answer 19

Affirmative waste and permissive waste. (192)

Question 20

What is affirmative waste? (Barros)

Answer 20

Affirmative waste involves a voluntary act by the present interest holder that damages the property. The classic example of affirmative waste is the intentional destruction or alteration of a building or other valuable improvement to the land. (192)

Question 21

What is the good husbandry doctrine? (Barros)

Answer 21

The present interest holder may harvest timber to the extent that it is consistent with good management of the forest, but excessive timber harvesting is prohibited. (192)

Question 22

What is the open mines doctrine? (Barros)

Answer 22

The present interest holder may continue to extract mineral resources if extraction was already being done when the present estate began. The present interest holder may not, however, begin new mineral extraction. (192)

Question 23

What is permissive waste? (Barros)

Answer 23

Permissive waste involves the failure of the present interest holder to exercise reasonable care to protect and maintain the property. It is a matter of negligence, rather than an affirmative intentional act. (192)

Ex: The failure to maintain a building and the failure to pay taxes. Failure to eject an adverse possessor may also constitute permissive waste.

Question 24

What is the controversial category of waste? (Barros)

Answer 24

Ameliorative Waste.

Question 25

What is Ameliorative Waste? (Barros)

Answer 25

Ameliorative waste involves a voluntary act by the present interest holder that increases the value of the property.

Remember that the present interest holder is obligated to leave the property in a substantially unchanged condition. A valuable improvement would violate this obligation. A claim for ameliorative waste would probably be rejected in a majority of U.S. jurisdictions. (193)

Question 26

What is a useful mnemonic to remember how trusts are created? (Piper)

Answer 26

Trusts are created “BIT BY BIT”:

B – A BENEFICIARY must be clearly and unambiguously named
I – The INTENT to create a trust must be clear
T – TRANSFER of assets to the trust