MC Trusts

Question 1

What is a trust

Answer 1

A trust is 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 are the three types of trusts (including short explanations of them)

Answer 2

Trusts are classified according to their method of creation:

(i) express trusts arise from the expressed intention of the owner of property to create the relationship with respect to the property;
(ii) resulting trusts arise from the presumed intention of the owner of property; and
(iii) constructive trusts arise in cases involving wrongful conduct and unjust enrichment

Question 3

How are trusts governed in Florida

Answer 3

Express trusts are governed by the Florida Trust Code (“FTC”). The common law of trusts and principles of equity supplement the FTC, except to the extent modified by the Code or another law of Florida

Question 4

What are the five elements required for an express trust (and also two additional things that must be present)

Answer 4

The five elements required for an express trust are:
(i) a settlor with capacity to convey;
(ii) a present intent to create a trust relationship;
(iii) a competent trustee with duties;
(iv) a definite beneficiary; and
(v) the same person is not the sole trustee and the sole beneficiary.
Additionally, there must be a present disposition in trust of specific property then owned by the settlor, and the trust must have a valid trust purpose. Consideration is not required

Question 5

For the element of an express trust that “a settlor with capacity to convey,” what does it mean

Answer 5

The capacity required to create a revocable or testamentary trust is the same as that required to make a will. The settlor’s lack of legal capacity to convey prevents a trust from arising, and undue influence, fraud, or duress renders the trust void. Similarly, to create an irrevocable trust, the settlor must have legal power to convey the trust property

Question 6

For the element of an express trust of “present intent to create a trust relationship,” what does it mean

Answer 6

The settlor’s intention to create a trust is essential to the existence of an express trust. Intent may be manifested by written or spoken words or by the conduct of the settlor–unless the Statute of Wills or the Statute of Frauds applies. An oral trust of personal property is valid in almost all jurisdictions. Communication of intent to the beneficiaries is not necessary; delivery of the deed to the trustee is sufficient

Question 7

For purposes of the rule that there must be a present intent to create a trust relationship, does the property need to actually be owned at the time of conveyance to trust?

Answer 7

Yes, the intent to create a present trust must have been externally manifested by the settlor at the time he owned property and prior to its conveyance to another. (However, the conduct of the parties subsequent to the conveyance may be evidence of an earlier intent)
Note: Also, the settlor’s intent must be that the trust take effect immediately, not at some future time–although a future interest can be trust property

Question 8

What is a precatory expression and how does it affect the creation of a trust?

Answer 8

A settlor’s expression of a hope, wish, or mere suggestion that the property be used in a certain way is called precatory language. The usual inference is that precatory expressions do not create a trust. This inference can be overcome by:

1) definite and precise directions;
2) directions addressed to a fiduciary (e.g., executor under a will);
3) a resulting “unnatural” disposition of property (e.g., close relative will otherwise take nothing) if no trust imposed; or
4) extrinsic evidence showing that the settlor previously supported the intended beneficiary

Question 9

What is the rule of existence of a trust based on the trustee (for example, if the trustee dies or refuses to accept appointment)

Answer 9

Once established, a trust will not fail because the trustee dies, refuses to accept appointment, or resigns. The court will appoint a successor trustee unless it is clear that the settlor intended the trust to continue only so long as a particular trustee served. The absence of a trustee may cause an attempted inter vivos trust to fail for lack of delivery.

Question 10

What are the two ways in which a person can accept a trusteeship?

Answer 10

by:

(i) substantially complying with the acceptance terms in the trust instrument; or
(ii) accepting delivery of trust property, exercising powers or performing duties as trustee, or indicating acceptance

Question 11

May the person designated a trustee still act to preserve the trust property without actually accepting the trusteeship? If so, how so?

Answer 11

The person designated as trustee may still act to preserve the trust property without accepting the trusteeship, provided he sends notice of rejection to a qualified beneficiary.

Question 12

What happens if the trusteeship is not accepted within a reasonable time?

Answer 12

It is presumed to be rejected

Question 13

One rule is that the settlor must intend to impose enforceable duties on the trustee. However, if duties are not spelled out in the trust instrument, what happens?

Answer 13

the court will usually imply duties if there is an intention to create a trust, a res, and an identified beneficiary

Question 14

What are the qualifications for a trustee

Answer 14

Anyone who has capacity to acquire and hold property for his own benefit and has capacity to administer the trust may be a trustee. (Minors and insane persons can hold property but cannot administer).

Question 15

What is the compensation and reimbursement to a trustee

Answer 15

A trustee is entitled to reasonable compensation or to compensation specified in the trust instrument. A trustee is entitled to reimbursement for expenses incurred in the trust’s administration and any other expenses that resulted in a benefit to the trust.

Question 16

How does a trustee get removed, what are the four grounds for removal, and what is the basic factor considered

Answer 16

A court can remove a trustee on its own motion or upon request by the settlor, a beneficiary, or a co-trustee. Grounds for removal include: (i) a serious breach of trust; (ii) lack of cooperation among co-trustees; (iii) unfitness, unwillingness, or persistent failure to administer; or (iv) a substantial change in circumstances. The basic factor considered is whether continuation in office would be detrimental to the trust.

Question 17

Does a trustee need a reason to either disclaim trustee status or refuse appointment as a trustee?

Answer 17

No

Question 18

May a trustee accept a trust in part and disclaim it in part?

Answer 18

No

Question 19

A rule is that a testamentary trust is treated as in existence as of the settlor’s death, and the trustee’s acceptance “relates back” to that date. What is the primary issue with that?

Answer 19

It is thus possible for a trustee, by accepting, to become liable (in his fiduciary capacity) on tort claims arising prior to the time he accepted

Question 20

What are the two ways in which a trustee can resign

Answer 20

by either:

(i) giving 30 days’ notice to the qualified beneficiaries, settlor (if living), and co-trustees; or
(ii) obtaining court approval

Question 21

What happens if the sole trustee and sole beneficiary are the same individual

Answer 21

If they are the sole trustee and sole beneficiary and hold precisely the same interests, titles merge and the trust terminates.

Question 22

A trust cannot exist without someone to enforce it. Thus a beneficiary is necessary to the validity of every trust except what two kinds of trusts?

Answer 22

charitable and honorary trusts

Question 23

Who is a qualified beneficiary (they must be one of what two things)

Answer 23

A qualified beneficiary is a living beneficiary who, on the date the beneficiary’s qualification is determined, is: (i) a current beneficiary, or (ii) a first-line remainderman (i.e., one who would become eligible to receive distributions were the event triggering the termination of a beneficiary’s interest or of the trust itself to occur on the qualification date.)

Question 24

What is the capacity necessary to be a beneficiary

Answer 24

Any person, natural or artificial, capable of taking and holding title to property can be a beneficiary of a private trust

Question 25

What is an incidental or indirect beneficiary

Answer 25

Not everyone who benefits from a trust is considered to be a beneficiary. The trust must operate directly to benefit the person (e.g., attorney designated by trust instrument is not beneficiary).

Question 26

Is notice to a beneficiary essential to the validity of a trust? If not, does lack or notice indicate anything?

Answer 26

Notice to a beneficiary is not essential to the validity of a trust. Lack of such notice may indicate, however, that no trust was intended. Acceptance by the beneficiary is required but can take place after a valid trust is created. Acceptance may be express or implied and is generally presumed. However, a trust will not be forced on a beneficiary, and he may disclaim his rights by filing a written disclaimer. To avoid gift taxes, it must be filed within nine months

Question 27

What is an anti-lapse statute as it relates to a trustt and when does it apply

Answer 27

Absent a contrary intent expressed in the trust instrument, Florida applies its anti-lapse statute to future interests created in trusts

Question 28

How does divorce affect a trust

Answer 28

A final decree of divorce or annulment revokes all beneficial gifts and fiduciary appointments in favor of a former spouse, including revocable trusts. The trust instrument is read as though the former spouse is deceased

Question 29

What is the rule on definiteness of beneficiaries as it pertains to a private trust? What is the effect of an unascertained beneficiary and a class gift?

Answer 29

There must be definite beneficiaries in order to have a private trust (not required in charitable trusts).
Unascertained beneficiaries - Beneficiaries may be "definite" even though not yet ascertained (e.g., unborn beneficiaries). Beneficiaries must be ascertainable by the time their interests are to come into enjoyment.
Class Gifts - At common law, a private trust exists for the benefit of a class, and the class must be reasonably definite. As long as the class is reasonably definite, the trust may authorize the trustee to exercise his discretion in selecting members to be benefited, or may provide that only those who meet certain requirements will benefit. Broad power to choose beneficiaries, however, constitutes a power of appointment rather than a trust. Under the FTC, however, a settlor may empower the trustee to select the beneficiaries from an indefinite class. Failure to exercise the power gives rise to a resulting trust in favor of the settlor or his successors

Question 30

What happens if a trust fails for lack of beneficiary

Answer 30

A resulting trust in favor of the settlor or his successors is presumed

Question 31

What happens if there is no res (no property) in the trust

Answer 31

Where there is no trust property, the trust fails because the trustee has no property to manage

Question 32

Which of these three interests may be held in trust? 1) a future interest, 2) an interest not yet in legal existence, and 3) future profits from an existing contract

Answer 32

1 and 3 can be held in trust (a future interest and future profits from an existing contract)

Question 33

Must the settlor have the power to convey property in order for it to be trust res?

Answer 33

Yes, trust res must be existing property that the settlor has the power to convey, including intangibles (e.g., promissory notes) in which the settlor has an assignable interest

Question 34

Must the trust res be segregated from other property?

Answer 34

Yes, the res must be identifiable and segregated, but the res may be a fractional or undivided interest in specific property

Question 35

May a debtor hold his own debt in trust?

Answer 35

No, a debtor cannot hold his own debt in trust, but the debtor can declare himself trustee of particular property from which the debt is to be paid, and the debt can be held in trust by another person.

Question 36

A trust purpose is invalid if it is one of what four things?

Answer 36

(i) illegal,
(ii) contrary to public policy (e.g., encourages immorality),
(iii) impossible to achieve, or
(iv) intended to defraud the settlor’s creditors or based on illegal consideration

Question 37

What three things may happen if a condition attached to an interest is against public policy?

Answer 37

(i) the settlor’s alternative desire controls if expressd.
(ii) if the illegal condition is a condition subsequent, the condition is invalidated but the trust is valid.
(iii) if the illegal condition is a condition precedent, the preferred view is to hold the interest valid unless there is evidence that the settlor’s wish would be to void the beneficiary’s interest altogether if the condition is unenforceable

Question 38

What is Florida’s Uniform Statutory Rule Against Perpetuities?

Answer 38

Under the Uniform Rule, enacted in FL, a nonvested property interest in a trust is invalid unless: (i) when the interest is created it is certain to vest or terminate within the common law period (21 years after the death of a life in being), or (ii) it actually vests or terminates within 360 years after its creation

Question 39

How is an inter vivos trust created

Answer 39

A trust can be created either by a person declaring himself trustee for another or by the transfer of property to another as trustee. The present intent required must be manifested by conduct (delivery) or words (declaring oneself trustee). Delivery means placing the trust property out of the settlor’s control (unless the settlor serves as trustee). Remember that the trust arises when the settlor subsequently acquires the res and remanifests trust intent

Question 40

When is a writing required for trust creation

Answer 40

Florida does not require a writing for a trust of personal property. Oral trusts may be established only by clear and convincing evidence. For a trust of land, however, a written instrument signed by the person entitled to impress the trust upon the property is required under the Statute of Frauds. Note that an otherwise invalid oral trust of land may be enforced by imposing a constructive trust.

Question 41

What rule must revocable trusts containing testamentary aspects comply with

Answer 41

Provisions in a revocable inter vivos trust created on or after July 1, 2007, that control the disposition of trust property on the settlor death are ineffective unless the trust instrument and any amendments are executed in accordance with the Statute of Wills

Question 42

How does the parol evidence rule apply to inter vivos trusts

Answer 42

Florida allows extrinsic evidence even if the writing is unambiguous, and the court may consider evidence that contradicts an apparent plain meaning of the trust instrument.

Question 43

What formalities are required for testamentary trusts

Answer 43

Trust intent and the essential terms of the trust (trust res, beneficiaries, and trust purpose) must be ascertained from the will itself, from a writing incorporated by reference into the will, or from the exercise of a power of appointment created by the will.

Question 44

What is a secret testamentary trust and what is the effect

Answer 44

Where a will makes a gift that is absolute on its face, but was in fact made in reliance on the beneficiary’s promise to hold the property in trust for another, the intended trust beneficiary may present extrinsic evidence of the promise. If the promise can be proven by clear and convincing evidence, a constructive trust will be imposed on the property in favor of the intended trust beneficiary.
Note: a constructive trust will be imposed in the above case even if the will beneficiary did not make the promise until after the will was executed. Furthermore, it does not matter whether the will beneficiary intended to perform the promise when he made it; all that matters is that the testator relied on the promise.

Question 45

What is a semi-secret testamentary trust and what is the effect

Answer 45

In a semi-secret trust, the will makes a gift in trust but fails to name the beneficiary. The gift fails, and the named trustee holds the property on a resulting trust for the testator’s heirs

Question 46

What happens if a trust is procured by fraud, duress, mistake or undue influence?

Answer 46

The trust or any part so procured is void

Question 47

At what point may a trust be contested

Answer 47

An action to contest all or part of a revocable trust, or the revocation of part of a trust, may not be brought until the trust becomes irrevocable, by its terms or by the settlor’s death. An action to contest the revocation of the entire trust may not be commenced until after the settlor’s death.

Question 48

How are trust provisions that penalize an individual for contesting the trust treated?

Answer 48

Provisions of those kind are unenforceable.

Question 49

What are the three important ways in which the rules governing charitable trusts differ from those applicable to private trusts

Answer 49

A charitable trust must have indefinite beneficiaries, it may be perpetual, and the cy pres doctrine applies

Question 50

What does it mean that a charitable trust must have a charitable purpose

Answer 50

A charitable trust must have a purpose considered to benefit the public. Charitable purposes include the relief of poverty, the advancement of education or religion, the promotion of health, and the accomplishment of governmental purposes (e.g., parks and museums). The class to be benefited may be limited, but may not be so narrow as to only benefit a few individuals whom the settlor wishes to aid personally

Question 51

By whom can suit to enforce a charitable trust be brought

Answer 51

The settlor, a qualified beneficiary, or the attorney general

Question 52

What is the only thing to which the rule against perpetuities applies when it comes to charitable trusts

Answer 52

Shifting interests between private and charitable uses

Question 53

What is the meaning of cy pres under charitable trusts

Answer 53

When a charitable purpose selected by the settlor is impracticable, unlawful, impossible to achieve, or wasteful, the settlor, trustee, or any qualified beneficiary may petition the court to distribute the property in some other manner consistent with the settlor’s charitable purposes under the doctrine of cy pres, which means “as near as possible”

Question 54

What is an honorary trust and for how long may it be enforced

Answer 54

Honorary trusts are commonly established for the benefit of pets or for the saying of masses for the settlor’s soul. Under the FTC, the trust is enforceable by someone named in the trust instrument or appointed by the court. The trust property may be applied only to carry out the terms of the trust. Any excess property is distributed to the settlor or his successors unless the trust instrument provides otherwise. The FTC expressly provides that an honorary trust (not for the care of animals) may not be enforced for more than 21 years. A trust for the care of animals alive during the settlor’s lifetime is valid. The trust terminates when the animal dies. A trust for the maintenance or care of any public or private burying ground, churchyard, or other place for burial is deemed to be for a charitable purpose and thus is not subject to the Rule Against Perpetuities

Question 55

What happens to a beneficiary’s interest if they kill the settlor

Answer 55

A trust beneficiary who unlawfully and intentionally kills or participates in procuring the death of the settlor or another person upon whose death the beneficiary’s interest depends is not entitled to any trust interest, including homestead, dependent upon the victim’s death. The interest devolves as though the killer predeceased the victim. A conviction of murder in any degree is conclusive evidence that the killing was unlawful and intentional; but where there has been no conviction, the court may determine by the greater weight of the evidence whether the killing was unlawful and intentional

Question 56

What is a future interest under the terms of a trust contingent upon?

Answer 56

A future interest under the terms of a trust is contingent upon the beneficiary surviving the distribution date

Question 57

What happens if a beneficiary of a future interest fails to survive the trust’s distribution date and leaves surviving descendants

Answer 57

The surviving descendants take the deceased beneficiary’s interest, per stirpes. This statute applies regardless of whether the settlor and predeceasing beneficiary are related

Question 58

To what extent is voluntary assignment of a beneficiary’s interest allowed

Answer 58

Absent restrictions by statute or by the trust instrument, a beneficiary may freely transfer his interest in the trust. The assigned interest remains subject to all previous conditions and limitations.

Question 59

To what extent is involuntary assignment of a beneficiary’s interest allowed

Answer 59

Absent restrictions by statute or by the trust instrument, an insolvent trust beneficiary’s creditors may levy on his beneficial interest. The interest is subject to judicial sale. To avoid this, a court may order the trustee to pay the beneficiary’s income to the creditors until the debt is satisfied. A settlor’s creditors may levy on the property of a revocable trust to the extent such property, if owned directly by the settlor, would not be exempt from creditor’s claims. if the trust is irrevocable, a creditor may reach distributions made for the settlor’s benefit.

Question 60

What are the restraints on alienation of a spendthrift trust

Answer 60

A spendthrift trust precludes the beneficiary from voluntarily or involuntarily transferring his interest in the trust, and his creditors are precluded from reaching it to satisfy their claims. The purpose is to protect the beneficiary from his own improvidence. Although a spendthrift trust is a restraint on alienation, most courts uphold spendthrift restrictions. A beneficiary’s creditors cannot reach his interest until income has been paid to him.

Question 61

Despite the restrains on alienation of a spendthrift trust, the spendthrift clause cannot be used to shield the beneficiary from what three things.

Answer 61

(i) his own creditors where the beneficiary is the settlor; (ii) claims for support, alimony, and services provided to protect his interest; or (iii) claims by the government. Moreover, a creditor can reach a mandatory distribution of income or principal if the trustee did not make it within a reasonable time. (when it is unclear whether a beneficiary is the settlor, determine who furnished the consideration for the creation of the trust. If a person furnishes the consideration, he is the settlor even though the trust is created by another person.)

Question 62

When will a trust terminate automatically

Answer 62

A trust will terminate automatically upon the expiration of the term specified in the instrument or when all of the purposes of the trust have been accomplished or have become unlawful, contrary to public policy, or impossible to achieve

Question 63

When is a settlor allowed to revoke or amend a trust

Answer 63

any time unless the terms expressly state that it is irrevocable

Question 64

What are the rules on terminating an uneconomic trust

Answer 64

A trustee can terminate a trust if the trust property is less than $50k and the amount is insufficient to justify the cost of administration, as long as the trustee provides the qualified beneficiaries with notice. This power to terminate applies to spendthrift trusts unless expressly prohibited.

Question 65

To what extent is a trustee allowed to combine or divide trusts

Answer 65

Absent contrary terms in the trust, the trustee can combine several trusts into one trust or divide one trust into several trusts, provided doing so does not frustrate any purposes of the trusts or impair the rights of any beneficiary. The trustee is not required to obtain the consent of the qualified beneficiaries prior to the combining or dividing trusts, but he must provide them with notice.

Question 66

In what three circumstances may a trustee or qualified beneficiary petition the court to modify an irrevocable trust

Answer 66

if (i) the purposes of the trust have been fulfilled or have become illegal, impossible, wasteful, or impracticable to fulfill; (ii) because of circumstances not anticipated by the settlor, compliance with the terms of the trust would defeat or substantially impair a material purpose; or (iii) a material purpose no longer exists

Question 67

When may a court modify an irrevocable trust if compliance with the trust terms is not in the best interests of the beneficiaries

Answer 67

The court must exercise its discretion and make modifications that conform to the extent possible with the settlor’s intent, taking into account the current circumstances and best interests of all beneficiaries. This type of judicial modification does not apply if: (i) all beneficial interests must vest or terminate within 21 years after the death of a life in being or within 90 years after its creation, and (ii) the terms of the trust expressly prohibit judicial modification

Question 68

When can a court reform the terms of a trust to reflect the settlor’ intent

Answer 68

If a mistake in the terms is shown by clear and convincing evidence

Question 69

After the settlor’s death how may the trustee and any qualified beneficiaries modify the terms of an irrevocable trust

Answer 69

By unanimous agreement. Modification is permitted even if the trust contains a spendthrift clause or a provision that prohibits amendment or revocation. Nonjudicial modification does not apply if all beneficial interests must vest or terminate no later than 21 years after the death of a life in being or within 90 years after its creation, unless expressly permitted in the trust instrument.

Question 70

To what extent is a nonjudicial agreement to modify binding on unborn or unascertained beneficiaries

Answer 70

An agreement to modify is binding on an unborn or unascertained beneficiary, or one who is a minor or under a legal disability, to the extent that his interest is represented by another beneficiary having the same or greater quality of beneficial interest, and if there is no conflict of interest between such person and such beneficiary or among the persons represented

Question 71

Under the common law, provided for by the FTC, how may an irrevocable trust be terminated even though it is a discretionary or spendthrift trust

Answer 71

If the settlor and all beneficiaries consent. The trustee’s consent to the termination is not required. However, if any beneficiary is incompetent or a minor, the trust cannot be terminated because the incompetent’s conservator or the minor’s guardian cannot give the necessary consent.

Question 72

Under the common law, provided for by the FTC, how may an irrevocable trust be terminated even though its a discretionary or spendthrift trust and the settlor is dead

Answer 72

It may be terminated upon the consent of all beneficiaries only if the termination would not interfere with a material purpose of the settlor. Note that a common trust purpose is to keep property out of a beneficiary’s hands until he reaches a certain age; a court would probably not allow this type of trust to be terminated early. Also, spendthrift trusts cannot be terminated by agreement of the beneficiaries.

Question 73

What is the scope of power (including the sources for that power) of a trustee

Answer 73

The trustee can properly exercise only such powers as are expressly or impliedly conferred upon her. These include powers: (i) expressly conferred upon her by the terms of the trust (which control); (ii) that an unmarried individual has over her own property; (iii) that are appropriate to achieve the proper investment, management, and distribution of the trust property; and (iv) conferred upon her by the FTC

Question 74

What is the difference between an “imperative” and a “discretionary” trustee power

Answer 74

A power is “imperative” if the trust instrument requires its exercise. “Discretionary” powers are ones that the trustee may or may not perform. Both are subject to judicial review for abuse of discretion. A trustee is not immune from review even if given “uncontrolled” discretion, and the court will intervene if the trustee fails to exercise any judgment at all

Question 75

To whom does is a trustee’s duties owed

Answer 75

Under a revocable trust, a trustee’s duties are owed exclusively to the settlor. For an irrevocable trust, a trustee owed duties to all of the trust beneficiaries.

Question 76

What are the duties of a trustee

Answer 76

A trustee has a duty to administer the trust in good faith and in a prudent manner, in accordance with the terms and purposes of the trust instrument and the interests of the beneficiaries. If a trustee has special skills or expertise, she will be held to a higher standard. If there is more than one beneficiary, the trustee must act impartially, taking into account any of their differing interests. Note that a trustee is under a duty to personally administer the trust and may delegate duties only as a reasonably prudent trustee would.

Question 77

What is the scope of the duty of loyalty, including the seven major things that breach that duty

Answer 77

Absent court approval or express waiver in the trust instrument, a trustee cannot enter into any transaction in which she is dealing with the trust in her individual capacity. A trustee owes a duty of undivided loyalty to the trust and its beneficiaries. (1) a trustee cannot buy or sell trust assets even if the price is a fair one. (2) A trustee may not sell property of one trust to another trust of which she is also trustee. (3) A trustee may not borrow trust funds nor loan her personal funds to the trust (except to protect the trust), and any interest paid on such a loan must be returned to the trust. (4) A trustee cannot use trust assets to secure a personal loan. (5) A trustee cannot personally gain through her position as trustee. (6) A corporate trustee cannot invest in its own stock as a trust investment. But it can retain its own stock if such stock was a part of the original trust res when the trust was established, provided that retention of the stock meets the prudent investor standard. (7) self-employment can constitute a form of prohibited dealing. However, if the trustee renders extraordinary services to the trust, she may be entitled to additional compensation

Question 78

Is the duty of loyalty violated if a trustee enters into a transaction with her spouse, close relatives, attorney, or corporation in which she owns a significant interest?

Answer 78

Yes, presumably

Question 79

A transaction involving trustee self-dealing is voidable by the beneficiary unless what 6 things

Answer 79

unless: (i) a court or the terms of the trust approved it; (ii) the beneficiary failed to bring suit within the prescribed time period; (iii) the beneficiary gave her consent, ratification, or release; (iv) it involves a contract or claim arising before the trustee became trustee; (v) the settlor gave his written consent to it while the trust was revocable; or (vi) it is one by a corporate trustee that involves a money market mutual fund, mutual fund, or a common trust fund

Question 80

What is the four pronged duty to report

Answer 80

A trustee must: (i) provide the qualified beneficiaries with her name and address; (ii) notify the beneficiaries that the fiduciary attorney-client privilege applies; (iii) respond to beneficiary requests for information about trust’s administration and provide a copy of the trust instrument if requested; and (iv) if the trust is irrevocable, furnish an annual accounting

Question 81

How are gains and losses treated if a trustee commingles trust property with her own

Answer 81

losses are charged to the trustee and gains are credited to the trust.

Question 82

Does a trustee have a duty to enforce claims of the trust and to defend the trust

Answer 82

yes

Question 83

What is the scope of the duty to preserve trust property and make it productive

Answer 83

The power to invest is normally implied from the duty to make trust property productive. The trustee is expected to take actions to, e.g., lease land, collect claims, and invest money. The measure of damages for breach of this duty is the amount of income that would normally accrue from proper investments

Question 84

What is the standard of care a trustee must exercise with investments

Answer 84

A trustee must exercise reasonable care, skill, and caution when investing and managing trust assets. A trustee with special skills or expertise, or who has represented herself as having such knowledge, has a duty to use such skills or expertise. Note that a trustee must act exclusively for the beneficiary when investing and managing trust assets. If there is more than one beneficiary, she must act impartially in investing and managing the trust assets.

Question 85

How is the ‘prudence’ of an investment evaluated when determining whether a trustee lived up to the standard of care when investing

Answer 85

Investment decisions must be evaluated 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.

Question 86

What 6 factors are relevant and must be considered when making investment decisions as a trustee

Answer 86

(i) general economic conditions; (ii) the possible effect of inflation and deflation; (iii) the expected tax consequences of investment decisions or strategies; (iv) the role that each investment plays within the overall trust portfolio; (v) the expected total return from income and appreciation of capital; and (vi) the duty to incur only reasonable and appropriate costs. Note that a trustee must also diversify investments of the trust unless she reasonably determines that the interests of the beneficiaries and the purposes of the trust are better served without diversification

Question 87

Is delegation of investment and management functions permitted in investing trust assets?

Answer 87

Yes. But note that the trustee must act prudently in (i) selecting an agent; (ii) establishing the scope and terms of the delegation; and (iii) periodically reviewing the agent’s actions

Question 88

What four things may the court do if a trustee commits, or is about to commit, a breach of his trust duties

Answer 88

the court may: (i) enforce specific performance of the trustee’s duties, (ii) enjoin the trustee from committing a breach of trust, (iii) compel the trustee to pay money or restore property, or (iv) suspend the trustee

Question 89

To what extent is a trustee liable if he commits a breach of trust

Answer 89

he is liable to the beneficiaries for the greater of (i) the amount necessary to restore the trust property and distributions to what they would have been absent the breach, or (ii) the trustee’s profit from the breach

Question 90

What is the statute of limitations to bring a claim against a trustee for breach of trust

Answer 90

Claims against the trustee for breach of trust generally must be brought within four years. However, a beneficiary must bring her action within six months of receiving any report disclosing the breach. The limitations does not begin to run in the absence of such report unless the beneficiary has actual knowledge of: (i) the facts giving rise to the action, when such knowledge is established by clear and convincing evidence; or (ii) the trustee’s repudiation of the trust. But where the beneficiary’s action is based on fraud, the statute does not run until the plaintiff discovers the fraud or could have discovered it with reasonable diligence. Note that the absolute outside restriction on when a claim can be asserted ranges from 10 to 40 years, and may be extended by 30 years if the trustee actively concealed facts supporting a cause of action

Question 91

A trustee is not liable to a beneficiary for a breach of trust despite his actions in what two scenarios

Answer 91

if: (i) he acted in reasonable reliance on the terms of the trust; or (ii) the beneficiary consented to the conduct, released the trustee from liability, or ratified the transaction, so long as the beneficiary was not improperly induced.

Question 92

Exculpatory clauses are void in what two scenarios

Answer 92

if they: (i) relieve the trustee of liability for breach of trust committed in bad faith or with reckless indifference; or (ii) appear in the trust instrument because of the trustee’s abuse of a fiduciary or confidential relationship with the settlor (unless he can show that the clause is fair and was adequately communicated to the settlor or her attorney)

Question 93

A co-trustee’s generally liable for acts of co-trustees?

Answer 93

No if he (i) did not join in the action and he exercised reasonable care in preventing the breach of trust or compelling the co-trustee to redress the breach; or (ii) joined in the action at the direction of a majority of the co-trustees but notified them of his dissent. If certain powers are conferred upon some co-trustees but not others, the excluded trustee as not liable for any consequences of complying with the exercise of those powers.

Question 94

To what extent is a trustee liable to third parties for his actions

Answer 94

A trustee may be sued on the contract or in tort in his representative capacity. he may be sued personally on the contract only if, in entering into the contract, he failed to reveal his representative capacity and identify the trust. he may be sued personally in tort only if he is personally at fault, but no by reason of respondeat superior

Question 95

What is the difference between the remedy afforded to a beneficiary or successor when a transaction that is a breach of trust is in the hands of a bona fide purchaser vs a non-bona fide purchaser

Answer 95

A beneficiary or successor trustee can set aside transactions that are breaches of trust if the property is not in the hands of a bona fide purchaser (BFP). A BFP “cuts off” the beneficiaries’ equitable interests. A third party is a BFP if he acquires the property for value and without notice of the trust. A person who knows of facts requiring an inquiry, which if pursued would have revealed the existence of a trust, is not a BFP. An innocent donee of trust property is not liable for damages but must restore the property, its value, or its substitute to the trust

Question 96

What is the rule on the ability of beneficiaries to bring direct suits against third parties

Answer 96

Direct suits by beneficiaries are not permitted against third parties who damage trust property; the trustee alone can sue. The beneficiaries’ remedy is to bring suit in equity to compel the trustee to sue the third party. Exceptions– direct actions by beneficiaries against third parties are permitted where the trustee: (i) participated in the breach, (ii) has left the jurisdiction and no successor trustee is appointed, or (iii) fails to sue a third person liable in tort or contract

Question 97

What is the adjustment power and the 9 factors to be considered when deciding to use it

Answer 97

If the trustee determines that by distributing only the trust’s income she is unable to comply with the requirement that all beneficiaries be treated fairly, the trustee may adjust between principal and income to the extent necessary. In deciding whether and to what extent to exercise the adjustment power, the trustee must consider the following factors: (i) the nature, purpose, and expected duration of the trust; (ii) the intent of the settlor; (iii) the identity and circumstances of the beneficiaries; (iv) the needs for liquidity, regularity of income, and preservation and appreciation of capital; (v) the nature of the trust’s assets; (vi) the net amount allocated to income under the other sections of the Act and the increase or decrease in the value of the principal assets; (vii) whether and to what extent the trust gives or denies the trustee the power to invade principal or accumulate income; (viii) the actual and anticipated effect of economic conditions on principal and income and effects of inflation and deflation; and (ix) the anticipated tax consequences of an adjustment

Question 98

How is the receipt of 1) money and 2) property other than money characterized

Answer 98

Money received from an entity such as a corporation (e.g., cash dividends) is characterized as income unless the money is characterized as a capital gain for federal income tax purposes, or is received in partial or total liquidation of the entity. All property other than money received form an entity (e.g., stock dividends) is characterized as principal. Examples: proceeds from a life insurance policy or other contract in which the trust or trustee is named beneficiary are allocated to principal. If a contract insures the trustee against a type of loss, the proceeds are allocated to income. Dividends on an insurance policy are allocated to the account from which the premiums are paid. For periodic receipts from a deferred compensation plan (e.g., pension plan), the receipt is income to the extent that the payment is characterized by the payor as income, and the balance is principal.

Question 99

What expenses are charged to income (as opposed to principal)

Answer 99

one-half of the regular compensation of the trustee and of any person providing investment advisory or custodial services to the trustee; one-half of all expenses for accountings, judicial proceedings, and other matters affecting both income and remainder interests; the entire cost of ordinary expenses; and insurance premiums covering the loss of a principal asset.

Question 100

What expenses are charged to principal (as opposed to income)

Answer 100

The remaining one-half of the compensation of the trustee and any person providing investment advisory or custodial services of the trustee; the remaining one-half of all expenses for accountings, judicial proceedings, and other matters affecting both income and remainder interests; payments on the principal of a trust debt; expenses of a proceeding that concerns primarily an interest in principal; estate taxes; and disbursements related to environmental matters

Question 101

What option does a trustee have to convert a trust to address concerns that an “income only” trust may not provide substantial economic support to the primary beneficiary

Answer 101

A trustee may convert such a trust into a total return unitrust. Under a total return unitrust, instead of receiving the trust’s income, the beneficiary receives an amount equal to 3 - 5% of the value of the trust principal, valued annually

Question 102

What is the test for distinguishing a trust from a will

Answer 102

whether the transfer creates some present gift, even if that gift is of a future interest subject to divestment (i.e., revocable trust is valid because interest passes to the beneficiary during the settlor’s lifetime; it merely becomes possessory on the settlor’s death)

Question 103

What powers may a settlor retain in an inter vivos trust–retainment of these powers does not make the trust invalid

Answer 103

the power to: (i) revoke, alter, amend, or modify the trust; (ii) appoint the income or principal by deed or will; (iii) add to or withdraw from the trust; (iv) remove trustees and appoint new ones; (v) control the trustee in the administration of the trust; (vi) receive income; or (vii) act as sole trustee

Question 104

How does a life insurance trust work, including the benefits and mechanics

Answer 104

Life insurance and similar death benefits may be paid into an unfunded revocable trust whose only purpose is to receive those funds upon the settlor’s death. By statute, Florida authorizes designation of “the trustee named in my will” as the beneficiary of life insurance proceeds. The statute also provides that any spendthrift protection provided in the insurance contract is retained. Thus, if the contract has such a provision, the insured’s creditors cannot reach proceeds payable to a testamentary trustee

Question 105

How does a power of attorney differ from a trust

Answer 105

A power of attorney creates an agency relationship, not a trust. A power of attorney must be signed by two witnesses and acknowledged by the principal. It can be made to survive the disability or incapacity of the principal if the instrument so states. A durable power can apply to any interest in property owned by the principal.

Question 106

What is a resulting trust as opposed to a constructive trust

Answer 106

Resulting trusts involve reversionary interests and are based on the presumed intent of the settlor. Constructive trusts are used to prevent unjust enrichment. They arise either where there is not valid express declaration of trust or, frequently, when no trust was even intended. The Statute of Frauds is inapplicable.

Question 107

Resulting trusts are of what three types

Answer 107

(i) purchase money resulting trusts, (ii) resulting trusts arising on failure of an express trust, and (iii) resulting trusts arising from an incomplete disposition of trust assets (i.e., excess corpus)

Question 108

What is a purchase money resulting trust (when is it created, exceptions, etc.)

Answer 108

A purchase money resulting trust is presumed whenever X (the beneficiary) furnishes the consideration for the acquisition of real or personal property but, with X’s consent, title is taken in the name of Y (the trustee). The consideration paid by X must be for the purchase of the property. The consideration (or obligation to pay) must be supplied at or before the time Y takes title. The burden is on X, the party claiming to be the beneficiary of a resulting trust, to prove by clear and convincing evidence that he supplied the consideration. Exceptions- where there is a close personal relationship between the parties, a gift is presumed rather than a trust. If X and Y take title for an illegal purpose, a trust cannot be implied. Lastly, no resulting trust arises when the transferee obtained title wrongfully. Note that where X supplies only part of the consideration, the resulting trust in his favor is only for a pro rata portion of the property

Question 109

What is a resulting trust on failure of express trust

Answer 109

A resulting trust arises where a settlor has conveyed property to a trustee under an express trust and (i) the trust is void or unenforceable, or (ii) the beneficiary is dead or cannot be located. A resulting trust may also apply on failure of a charitable trust where cy pres is inapplicable. On the other hand, a resulting trust will not be implied where: (i) the trust instrument specifically or implicitly provides for disposition of trust property when the trust has failed or been completed; (ii) the settlor was given consideration for his original transfer in trust; (iii) the settlor created the trust for an illegal purpose; or (iv) cy pres is applicable in cases of charitable trusts

Question 110

What is a resulting trust implied from excess corpus

Answer 110

A resulting trust in favor of the settlor also arises when the trust purpose is fully satisfied and some trust property remains. There could be a resulting trust of part of the corpus even before the trust is terminated if it is clear that there is excess trust corpus

Question 111

What is the basis for a constructive trust

Answer 111

A constructive trust is not really a trust but rather is a flexible equitable remedy to prevent unjust enrichment resulting from wrongful conduct, such as fraud, undue influence, or breach of a fiduciary duty. The constructive trustee’s only duty is to convey the property to the person who would have owned it but for the wrongful conduct. Proof of the facts necessary to establish a constructive trust must be made by clear and convincing evidence

Question 112

What are five major reasons for which a constructive trust may arise

Answer 112

1) arising from theft or conversion, 2) arising from fraud, duress, etc., 3) arising from breach of fiduciary duty, 4) arising from homicide, 5) arising from breach of promise (however, number 5 arises in certain situations and is not the general rule)

Question 113

What is the trustee’s sole duty once a court has declared a constructive or resulting trust to exist

Answer 113

The trustee’s sole duty is to convey legal title to the beneficiary. The trustee must also account for profits taken from the property or fair rental value of his use of it from the time of the occurrences raising the implied trust. There is no duty on the trustee to invest trust property.