Trusts

Question 1

What is a Trust?

Answer 1

A fiduciary relationship in which a trustee holds LEGAL title to specific property under a fiduciary duty to manage, invest, safeguard, and administer the trust assets and income for the benefit of designated beneficiaries, who hold EQUITABLE title.

Question 2

What is a Trustee?

Answer 2

A fiduciary and thus:

1) Must deal with the property with reasonable care;

2) Must maintain the utmost degree of loyalty; AND

3) Is personally responsible if their conduct falls beneath required standards.

Question 3

What is a beneficiary?

Answer 3

A person who enforces the trust and the person the trustee owes duties towards.

The person who receives the benefits of ownership as set forth in the trust.

Question 4

What is the Settlor?

Answer 4

The person who causes the trust to come into existence by supplying the initial trust property.

Question 5

What is an Express Trust?

Answer 5

Trusts that are created by the express intention of the settlor.

Question 6

What are the two categories distinguished primarily by the identity of their beneficiaries of express trusts?

Answer 6

1) Private beneficiaries (certain ascertainable persons)

2) Charitable beneficiaries (indefinite class of persons or the public in general)

Question 7

What is a Resulting Trust?

Answer 7

Resulting trusts arise from the presumed intention of the owner of the property

Question 8

What are Constructive Trusts?

Answer 8

Constructive Trusts are an equitable remedy used to prevent unjust enrichment.

Question 9

The first step in any Trust question is to determine whether the trust is valid. What are the seven main elements of a valid trust:

Answer 9

1) Intent

2) Identifiable corpus

3) Ascertainable beneficiaries

4) Proper Purpose

5) Mechanics and formalities

6) Settlor

7) Trustee

Question 10

What are the five elements for a valid express trust intent?

Answer 10

1) A settlor with capacity to convey;

2) A present intent to create a trust relationship;

3) A competent trustee with duties;

4) A definite beneficiary; AND

5) The same person is not the sole trustee and sole beneficiary.

Question 11

Is consideration necessary for a valid trust?

Answer 11

NO

Question 12

What is a qualified beneficiary?

Answer 12

A beneficiary who, on the date the beneficiary’s qualification is determined, is:

1) A current beneficiary; OR

2) A first-line remainderman.

Question 13

The general rule is that a settlor may create a trust for any purpose. However, a trust purpose is invalid if it is:

Answer 13

1) Illegal

2) Contrary to public policy

3) Impossible to achieve

4) Intended to defraud the settlor’s creditors or based on illegal consideration

Question 14

Under the UTC, a court may modify a trust even without the consent of all of the beneficiaries if:

Answer 14

1) The trust could have been terminated had all of the beneficiaries consented; AND

2) The interest of a beneficiary who does not consent will be adequately protected.

Question 15

What is the standard of care that the trustee must exercise?

Answer 15

Reasonable care, skill, and caution when investing and managing trust assets.

Question 16

A trustee may delegate investment and management functions but only if a prudent trustee of comparable skills could properly delegate under the circumstances. The trustee must act prudently in:

Answer 16

1) Selecting an agent;

2) Establishing the scope and terms of the delegation; AND

3) Periodically reviewing the agent’s actions.

If delegation is proper, the trustee is not liable to the beneficiaries for the decisions or actions of the agent.

Question 17

Standards imposed on the trustee are harsh and designed to deter wrongful conduct and to ease the burden of proving a breach of duty.

When dealing with a fiduciary obligation fact pattern, ask yourself two questions:

Answer 17

1) Was the act one that the trustee was authorized to perform by the instrument, by State law, or by implication?

2) If the act was proper to perform, did the trustee do so with the appropriate care, skill, and caution?

Question 18

What are the 5 duties of the trustee?

Answer 18

1) Administer the Trust

2) Loyalty

3) Report

4) Separate and Earmark property

5) Preserve and make trust property productive

Question 19

What is the standard of care the trustee must follow while administering the trust?

Answer 19

Trustee must act prudently, in good faith, and impartially.

Question 20

What is the duty of loyalty?

Answer 20

Trustee cannot represent both his personal interest and the interest of the trust. (no self-dealing)

Question 21

What is the duty to report?

Answer 21

Trustee must respond to beneficiaries requests and provide accounting

Question 22

What is the duty to separate and earmark property?

Answer 22

Trust assets must be kept physically separate from trustee’s personal assets and assets of other trusts (no commingling)

Question 23

What is the duty to preserve and make trust property productive?

Answer 23

Trustee must use reasonable care to invest the property (prudent investor rule), collect claims due, lease or manage land, record documents, pay taxes, and secure insurance.

Question 24

What are the remedies a court may do for a trustee’s breach of trust?

Answer 24

1) Enforce specific performance of the trustee’s duties;

2) Enjoin the trustee from committing a breach of trust;

3) Compel the trustee to pay money or restore property; OR

4) Suspend or remove the trustee.

Question 25

If a trustee commits a breach of trust, the trustee is liable to the beneficiaries for the greater of:

Answer 25

1) The amount necessary to restore the trust property and distributions to what they would have been absent the breach; OR

2) The trustee’s profit from the breach

Question 26

In the case of self-dealing, the beneficiary may have the choice of the following remedies:

Answer 26

1) Affirm the transaction if the trust profited

2) Set aside the transaction if the trust lost money

3) Trace profits from the trustee if the trustee profited

Question 27

How do you determine whether receipts are income or principal?

Answer 27

Income - money received (i.e., rent) unless the money is characterized as capital gain for federal tax purposes

Principal - All property other than money received from an entity (i.e., stock dividends) is characterized as principal.

Question 28

What is the constructive trustee’s only duty?

Answer 28

To convey the property to the person who WOULD HAVE owned it but for the wrongful conduct.

Question 29

What are the two requirements for terminating a trust by its beneficiaries?

Answer 29

1) All of the beneficiaries consent (including current and immediate remaindermen); AND

2) The modification will not interfere with a material purpose of the trust.

Question 30

What is the primary purpose of a spendthrift trust?

Answer 30

To provide support to a beneficiary whom the settlor lacks confidence in the judgment and management ability of the beneficiary.

Question 31

Under the traditional view, how do you create a valid pour-over gift from a Will to a revocable trust?

Answer 31

The trust must be in existence or must be executed at the time of the Will’s execution.

Question 32

True or False

A Will may devise property to a trustee of a trust established or to be established during the testator’s lifetime.

I.e., the trust may be established after the Will is executed but before the testator’s death.

Answer 32

TRUE

Question 33

May a beneficiary of a spendthrift trust voluntarily or involuntarily transfer their interest in the trust?

Answer 33

NO. The beneficiary may not sell or give away his rights to future income or principal.

Question 33

May a beneficiary of a spendthrift trust voluntarily or involuntarily transfer their interest in the trust?

Answer 33

NO. The beneficiary may not sell or give away his rights to future income or principal.

Question 33

May a beneficiary of a spendthrift trust voluntarily or involuntarily transfer their interest in the trust?

Answer 33

NO. The beneficiary may not sell or give away his rights to future income or principal.

Question 34

May creditors reach the assets in a spendthrift trust?

Answer 34

No. Creditors are generally unable to collect or attach their rights onto the trust’s property in a spendthrift trust.

Question 35

What is the exception where creditors may reach the trust assets in a spendthrift trust?

Answer 35

When the settlor is a beneficiary of the trust and attempts to protect his own retained interests from his creditors by the usage of a spendthrift provision.

In this case, the settlor-beneficiary’s creditors can reach his right to the income just as if the spendthrift restriction did not exist.

Question 36

A settlor’s promise to create a trust in the future is valid only if:

Answer 36

1) Supported by consideration; OR

2) He manifests anew an intention to create the trust when the assets come into existence.