MODIFICATION AND TERMINATION OF TRUSTS & INCOME & PRINCIPAL (UNIFORM PRINCIPAL AND INCOME ACT)

Question 1

MODIFICATION AND TERMINATION OF TRUSTS Issues

Answer 1

Modification by the settlor
Modification by the court
Termination of revocable trusts
Termination of irrevocable trusts

Question 2

Modification by the Settlor

Answer 2

The settlor can modify the trust if the settlor expressly reserves the power to modify

Settlor also has the power to modify if the settlor has the power to revoke.

Question 3

Modification by the Court

Answer 3

[A] There can be modification by the court regarding charitable trusts and the cy pres power: changing the mechanism to further settlor’s general charitable intent.
[B] There also can be modification of charitable trusts or private express trusts regarding the court’s deviation power.

Question 4

Deviation power (also known as Doctrine of Changed
Circumstances):

Answer 4

When the court exercises its deviation power, the court
changes the administrative or management provisions of
the trust.

With deviation the court is NOT changing beneficiaries

Question 5

When does settlor have the power to revoke?
[1] Majority Rule:

Answer 5

To retain the power to revoke the settlor must expressly reserve the power in the trust instrument

Question 6

When does settlor have the power to revoke?
[1] Minority Rule:

Answer 6

Settlor has the power to revoke, unless the trust
is expressly made irrevocable.

Question 7

Termination of Irrevocable Trusts
[A] Three ways an irrevocable trust can terminate prematurely, that is, before the time set for termination in the trust instrument:

Answer 7

1. Settlor and all the beneficiaries agree to terminate.
2. All the beneficiaries agree to terminate and all the material purposes have been accomplished.
3. By operation of law: passive trusts and the Statute of Uses:

Question 8

Settlor and all the beneficiaries agree to terminate.

Answer 8

“All the beneficiaries” means you must account for
contingent remaindermen: guardian ad litem (a guardian
appointed to represent those parties to a suit who are
incapacitated by infancy or otherwise) must be appointed
to represent them.

Question 9

All the beneficiaries agree to terminate and all the material
purposes have been accomplished.

Answer 9

[a] Reason: Equity will not see a trust continue to carry out a minor or insignificant purpose. What about the
insignificant purposes that have yet to be accomplished? The court will make certain that sufficient assets are set aside to accomplish these purposes. However, you do not need a $100 million trust kept alive to accomplish a $100 purpose.
[b] Remember to account for unborn beneficiaries with a
guardian ad litem.

Question 10

By operation of law: passive trusts and the Statute of Uses:

Answer 10

[a] Statute of Uses comes into play when you have a private express trust with a corpus of real property, and the trust is passive (the trustee has no active duties and is just holding bare legal title).
[b] In such case, under the Statute of Uses, the beneficiaries get legal title by operation of law, and thus the trust terminates.
[c] Not all jurisdictions recognize the Statute of Uses.
[d] What of a passive trust of stock or other personal
property? Answer: Statute of Uses does not apply, but, by analogy, the principles of the Statute of Uses should
apply because equity should not see a useless act done.

Question 11

INCOME & PRINCIPAL
(UNIFORM PRINCIPAL AND INCOME ACT) Issues

Answer 11

Income and expenses allocated to the life tenant
Income and expenses allocated to the remainderman
Adjustment power of trustee

Question 12

Income and Expenses Allocated to the Life Tenant
[A] The life tenant gets the following income:

Answer 12

1. Cash dividend
2. Interest income
3. net business income

Question 13

The life tenant’s interest pays for the following expenses:

Answer 13

[1] Interest on loan indebtedness
[2] Taxes
[3] Minor repairs (e.g. paint job)

Question 14

Income and Expenses Allocated to the Remainderman
[A] Remainderman gets the following income:

Answer 14

1. Stock dividends
2. stock splits
3. net proceeds on the sale of a trust asset

Question 15

Remainderman’s interest pays for the following expenses:

Answer 15

[1] Principal part of loan indebtedness
[2] Major repairs or improvements (new wing on a building)

Question 16

Adjustment Power of Trustee

Answer 16

[A] Trustee can disregard the above stated rules regarding allocation of income to life tenant and remainderman if a different allocation is necessary to administer the trust fairly.
[B] Example: If the only income from the trust is from the sale of trust assets, trustee may allocate some of the income to the life tenant.