Trusts knowledge questions Flashcards
If a will bequeaths money in trust, but does not name any beneficiary of the trust, what is the likely result?
A resulting trust will be imposed in favor of the settlor’s heirs or residuary legatees. Because a trust, and not a gift, was clearly intended from the face of the will, the trustee cannot take the money. A semi secret trust, such as the one here, is generally unenforceable because it would violate the policy of the Statute of Wills to permit the beneficiaries to be identified through parol testimony. With no identifiable beneficiaries, the trust fails.
For purposes of establishing a charitable trust, which of the following would be considered charitable purposes?
A A trust for the benefit of the Fraternal Order of Bison social organization
B A trust to fund the education of the children of the settlor’s neighbor, who cannot afford college tuition
C A trust for the benefit of the Republican Party and its candidates
D A trust to advance the doctrine of unfettered Second Amendment gun rights
The purpose of a charitable trust must be one considered to benefit the public, including relief of poverty, the advancement of religion or education, the promotion of health, and the accomplishment of a governmental purpose.
A trust for the dissemination of views of a political movement qualifies as educational and thus is charitable, but a trust for the benefit of a political party is not charitable.
Thus, (D) is correct, and (C) is incorrect. (A) is incorrect because a gift to a fraternal order is not charitable. The group’s primary purpose is social, not charitable. (B) is incorrect because the trust does not benefit the public as a whole. It benefits only a few individuals whom the settlor wishes to benefit individually.
what rules apply to charitable and non-charitable trusts?
When the beneficiaries of a single trust are both charitable and noncharitable (mixed), the special rules for charitable trusts do not apply unless two trusts can be found. All other statements are true
Despite spendthrift protection, trust assets may be reached by the beneficiary’s creditors for all of the following debts EXCEPT:
A Spousal support.
B Child support.
C Attorney’s fees for estate planning.
D Federal income taxes.
A spendthrift clause does not preclude claims for dependents’ support (e.g., child support and spousal support) or claims made by the state or federal government, including taxes.
For purpose of terminating a trust, which of the following trust language indicates a material purpose of the settlor that will likely prevent early termination by consent of the beneficiaries?
A “Income to Abigail until she turns 35, then the corpus is to be distributed to her.”
B “Income to Settlor for life, remainder to Abigail.”
C “Income to Abigail for life, remainder to Ben.”
D “Income to Abigail for 10 years, remainder to the Red Cross.”
A trust may be terminated early by the agreement of all beneficiaries as long as doing so would not violate a material purpose of the settlor in creating the trust.
(A) indicates a settlor’s material purpose to keep the property out of Abigail’s hands until age 35. Thus, Abigail would be unable to terminate the trust.
(B) includes the settlor as a beneficiary. A trust may be terminated on the consent of the settlor and all beneficiaries. If Settlor and Abigail agree to terminate, it does not frustrate a material purpose of Settlor.
(C) indicates a purpose to provide for successive enjoyment by a life tenant and remainderman. However, because Abigail could terminate the trust by conveying her interest to Benjamin (or vice versa), this is usually found not to be a material purpose, and they can terminate the trust by agreement. The same is true with
(D). The fact that the remainderman is a charity has no effect.
Which of the following statements represent a circumstance that would justify a court’s modification of a trust due to unanticipated circumstances?
A The trust requires the trustee to distribute profits to an experimental theatre group that has been the focus of recent community protests.
B The trust requires the trustee to keep the trust assets invested in Acme Corp. Acme Corp. manufactures cassette tapes and its stock has been in sharp decline.
C The trust places the settlor’s cattle farm in trust and to pay profit made on sale of beef to Daughter. Daughter has become vegan and wants the trust to invest elsewhere.
D The trust forbids the sale of certain investments. Trustee has discovered that companies represented by these investments employ labor practices that Trustee finds repugnant.
A court will generally permit termination of a trust or modification of its administrative or dispositive terms if circumstances unanticipated by the settlor threaten the purposes of the trust. In the case of the Acme Corp. stock, if the court does not permit deviation from the terms, the trust will likely lose all of its assets, thus defeating the settlor’s purpose.
The community’s objections to the theatre group is not an unanticipated circumstance as it does not threaten the settlor’s intent to help fund the arts.
Therefore, the court would not deviate from the trust’s terms. Similarly, Daughter’s change of personal eating choices to vegan is not a change in circumstance that would threaten the settlor’s primary intent to provide for Daughter. Trustee’s views and recent discovery of certain labor practices does not constitute a change of circumstances that would warrant a court modification
Under the Uniform Prudent Investor Act, a trustee must invest and manage trust assets as a prudent investor would. Which of the following statements is true under the Uniform Prudent Investor Act?
A Each investment decision is viewed in isolation.
B. Investment returns are measured by the production of income.
C The investment strategy must incorporate risk and return objectives suited to the particular trust.
D High risk investments are inherently imprudent.
The UPIA requires the trustee to tailor an investment strategy that incorporates risk and return objectives suited to the particular trust.
Modern investment practices reflect sensitivity to the risk/return curve. Returns correlate strongly with risk, but tolerance for risk varies greatly with the purposes of the trust and the relevant circumstances of the beneficiaries.
(A) is incorrect because the UPIA is based on the modern portfolio theory of investing. Thus, each investment decision must be evaluated, not in isolation, but in the context of the entire trust portfolio (corpus) and as part of an overall investment strategy that has risk and return objectives reasonably suited to the particular trust.
(B) is incorrect because under the UPIA, investment returns are measured by the “overall return” concept rather than the production of ordinary income.
(D) is incorrect because the UPIA permits a trustee to invest in any kind of property or any type of investment “consistent with the standards of this Act”; therefore, no particular type of investment is inherently imprudent. The overriding concern is the risk/return objective of the investment, rather than the classification of investments as prudent or imprudent.
Which of the following grants made in a revocable inter vivos trust violates the common law Rule Against Perpetuities?
A “Trustee is to pay the trust income to Settlor for life and, upon her death, to pay the trust income to Settlor’s brother, Brother, for his life and, upon his death, to distribute the trust principal to Cousin’s children who attain age 21.”
B “Trustee is to pay income to Settlor for life. Upon Settlor’s death, the trust income shall be paid, in equal shares, to Settlor’s surviving children for their lives. Upon the death of the last surviving child, the trust income shall be paid, in equal shares, to Settlor’s then-living grandchildren for their lives.”
C “Trustee to hold Redacre in trust for the benefit of A so long as A chooses to live there, and then for the benefit of the then-living descendants of A.”
D “Trustee to hold Greenacre in trust “for the benefit of my son John, whose house was destroyed by the Decatur Earthquake, and when his house has been rebuilt, then for the benefit of the American Red Cross.”
The common law Rule Against Perpetuities provides that for a property interest to be valid it must vest or fail not later than 21 years after one or more lives in being at the creation of the interest.
(D) violates the Rule because the interest of the Red Cross may not vest until more than 21 years after the death of any person living when the trust is created. Although charities are not subject to the rule, the fact that the Red Cross is a charity will not save this gift because the first beneficiary, John, is a private, definite beneficiary.
(A) does not violate the Rule because Cousin is a life in being when the interest is created and the gift to Cousin’s children who attain 21 will vest or fail within 21 years after Cousin’s death.
(B) does not violate the Rule because the Rule does not apply to grants in a revocable trust until the settlor’s death. So here, when the Rule is applied at Settlor’s death, Settlor’s children become the lives in being, and the interests of their children (Settlor’s grandchildren) will vest or fail at the death of the last measuring life.
(C) does not violate the rule because A will cease living on Redacre at her death (at the latest). Thus the interest of her descendants will vest or fail at that time (at the end of a life in being).
An irrevocable trust may be terminated by:
An irrevocable trust may be terminated or modified by the consent of all existing and potential beneficiaries as long as no material purpose of the trust will be frustrated. It may also be modified or terminated upon the consent of the settlor and all beneficiaries, including potential beneficiaries.
(A) is wrong because it includes only existing beneficiaries.
(C) misstates the rule. A trust cannot be modified or terminated upon the consent of the settlor and trustee. The trustee can terminate an uneconomic trust himself, but his consent to other types of terminations or modifications is irrelevant.
revocable trust….trustee ows duties to who?
Under a revocable trust, a trustee’s duties are owed exclusively to the settlor. For an irrevocable trust, a trustees duties are owed exclusively to the trust beneficiaries.
Trustee placed $10,000 of his own money and $10,000 of trust money into a single investment account that required a $20,000 minimum investment. The investments were successful, and the account is now worth $40,000.
Which of the following best describes how the money should be allotted?
A Trustee is entitled to $10,000, and the trust is entitled to $30,000
B Trustee is entitled to $20,000, and the trust is entitled to $20,000
C The trust is entitled to $40,000
D Trustee is entitled to $15,000, and the trust is entitled to $35,000
A trustee may not commingle trust property with his own property. If a portion of commingled assets increase in value, it is presumed that the assets belonging to the trust increased in value. Here, the entire amount of increase, $20,000, will be allotted to the trust. Trustee will get his initial investment back. Thus, Trustee is entitled to $10,000, and the trust is entitled to $30,000.
A revocable trust provides that the settlor is to receive the trust income for life and then the corpus is to be distributed to her children. The settlor funded the trust with 1,000 shares of ABC stock, which has been steadily declining. The settlor has indicated to the trustee that she wants the trust to retain the ABC stock. If the trustee leaves all of the trust property invested in ABC:
A The trustee has breached his investment duty by failing to diversify.
B The trustee has not breached his duty by failing to diversify because he is following the settlor’s direction.
C The trustee has not breached any duty because the stock was the settlor’s original investment.
D The trustee has not breached any duty because investing in one stock is within his broad discretion.
A trustee must diversify the investments of the trust unless the trustee reasonably determines that, because of special circumstances, the purposes of the trust are better served without diversification. While a trust is revocable, the trustee owes his duties only to the settlor, and the settlor’s direction to hold the stock constitutes a special circumstance that would relieve the trustee of his duty to diversify. This is a revocable trust and the settlor wants to keep the investment in the ABC stock; thus, the trustee is relieved of his duty to diversify.
(A) is therefore incorrect. (C) is incorrect because the fact that the trust property was initially invested in particular investment does not relieve a trustee of his duty to diversify, (D) is incorrect because the trustee’s discretion is limited by his duties to the trust, including the duty to diversify.
Can trustee delegate investment decisions?
A trustee may delegate investment and management functions that a prudent trustee of comparable skill could properly delegate under the circumstances. The trustee must exercise reasonable care, skill, and caution in selecting an agent, establishing the scope of the delegation, and must periodically review the agent’s performance.
(B) is incorrect because if the trustee exercises the above care in making the delegation, the trustee is not liable for the decisions or actions of the agent.
(D) is incorrect because a court order is not needed to delegate these decisions.
If a trustee commits a breach of trust, the trustee is liable to:
A The settlor for any profits arising from the breach.
B The settlor for any profits arising from administering the trust, and to the beneficiaries for any losses arising from a breach.
C The beneficiaries for the lesser of the amount needed to restore the trust property and distributions and the trustee’s profit from the breach.
D The beneficiaries for the greater of the amount needed to restore the trust property and distributions and the trustee’s profit from the breach.
If a trustee commits a breach of trust, the trustee is liable to the beneficiaries, not the settlor, for the greater of: (i) the amount needed to restore the trust property and distributions to what they would have been without the breach, and (ii) the trustee’s profit from the breach. Likewise, a trustee is liable to the beneficiaries, not the settlor, for any profit arising from the administration of the trust, even if there was no breach
