trusts

Question 1

inter vivos gift

Answer 1

occurs when the donor has intent to make gift and delivers the gift

actual delivery = physically hands over the property
constructive delivery = handing over key to box containing gift, etc.

acceptance is presumed if subject matter is of value

Question 2

joint tenant bank accounts

Answer 2

a surviving joint tenant is entitled to the money in joint bank account when the other JT on the account dies, unless the account was set up for convenience of the parties

Question 3

totten trust

Answer 3

a bank account with named beneficiary. if beneficiary survives account holder, the funds automatically vest to beneficiary.

revocable by will (must be expressly clear) and during trustee lifetime if the trustee withdrawals all funds from account or delivers a signed revocation in writing to the bank naming a new beneficiary

Question 4

trust definition

Answer 4

fiduciary relationship b/t trustee and trust beneficiaries that divides legal and equitable title

Question 5

legal title

Answer 5

trustee holds legal title to property and becomes owner of property for the record

Question 6

equitable title

Answer 6

beneficiary holds equitable title to the property and is entitled to financial benefits of property

Question 7

parties involved in trust

Answer 7

settlor: person who creates the trust
trustee: person who holds assets of the trust for benefit of beneficiaries; manages the trust assets according to terms of trust
beneficiary: person entitled to assets or profits

Question 8

express v. implied trust

Answer 8

express: created when person has intent to create trust and complies with formalities to create the trust 
express trusts are either private (private beneficiaries or ascertainable beneficiaries) or charitable (beneficiaries are charity or indefinite class of persons or public in general)

implied: created by conduct, regardless of whether there was intent to create a trust
implied trust is either resulting trust (arises from presumed intent of owner) or constructive (equitable remedy to prevent unjust enrichment)

Question 9

valid trust elements

Answer 9

1. intent to create trust
2. trust property/res
3. ascertainable beneficiaries
4. trustee
5. formalities (real property - must comply with SOF; testamentary trust - must comply with valid will formalities)

Question 10

intent to create a trust

Answer 10

intent may be determined by written or spoken words or conduct. no specific words required; only need to intend to create the legal relationship and duties of a trust and intent for it to take effect immediately, even if benefit is in future

precatory language: merely expresses the settlor’s wishes regarding his property, not intent

capacity: same as will contests

Question 11

trust property

Answer 11

property that makes up the trust as a whole - anything can make up trust property

must be specifically described with certainty or ascertainable with certainty from a description

future interest may be held in trust, but an interest not in legal existence cannot

unenforceable gift promise cannot be held in trust

Question 12

ascertainable beneficiary

Answer 12

at the time of creation, the settlor must either specifically identify the beneficiary by name or sufficiently describe how the beneficiary is to be identified (my kids = valid; my friends = invalid)

beneficiary must be able to possess title to the property (i.e., cannot be an animal), but the beneficiary does not need capacity to manage the property

sole trustee cannot be sole beneficiary

Question 13

revocable v. irrevocable trust

Answer 13

UTC/Maj: trust is revocable unless the settlor expressly provides otherwise

Question 14

pour over provision

Answer 14

devises property to a previously existing trust under terms of that trust

distinguishable from testamentary trust b/c a pour over provision does not create a trust; it transfers property into a trust already existing

thus, pour over cannot devise property to testamentary trust, b/c testamentary trust does not come into existence until death

Question 15

charitable trust

Answer 15

trust with purpose of accomplishing a substantial amount of social benefit to public at large or a reasonably large class

beneficiary may be indefinite, named, or contain a class of persons. RAP does not apply

cannot be invalidated for failure to state specific charitable purpose or beneficiary. courts will select one consistent with settlor’s intent if there is a general charitable intent

Question 16

cy pres doctrine

Answer 16

doctrine allows the court to modify the terms to make them as near as possible to OG intention of settlor to prevent trust from failing unless there is a specific charitable beneficiary or reverter clause

only applicable if:

1. property is placed in trust for charitable purpose that has become unlawful, impossible, or impracticable, to carry out AND
2. settlor manifested a general charitable intent to devote property to charitable purpose (majority of courts presume general charitable intent)

Question 17

discretionary trust

Answer 17

grants the trustee absolute power and discretion to make good faith determinations regarding when and how much of trust property should be distributed to beneficiaries of the trust

courts may interfere if trustee is making decisions in bad faith

Question 18

support trust

Answer 18

contains provisions directing the trustee to pay to beneficiary as much of the income or principal as is necessary for beneficiary’s education and support

can be pure or discretionary

pure support trust: limits trustee discretion. trustee is obligated to spend only so much of the property as necessary for education and maintenance of beneficiary

discretionary: trustee has discretion on distribution. if it contains an ascertainable standard, beneficiary may compel the trustee to make payments in accordance with that standard

Question 19

spendthrift trust

Answer 19

contains provisions designed to protect beneficiaries from their own carelessness. two main functions: beneficiary cannot sell or assign interest and creditors cannot reach beneficiary’s interest

creditors are able to reach interest if

1. settlor is beneficiary
2. creditor is seeking reimbursement for providing necessaries
3. creditor has order for child or spousal support

Question 20

rights of creditors in trust property

Answer 20

creditors have no greater rights in trust property than rights of beneficiary. if trust prevents beneficiary from receiving the property, then creditors cannot receive it either. absent spendthrift, creditors are able to reach property by attachment of the interest income to the beneficiary (i.e., cannot go after principal, but can go after interest income if there are no spendthrift provisions)

creditors can reach the interest once distributed

Question 21

alienability of trust interest

Answer 21

interests are alienable, devisable, and descendible unless terms of trust provide otherwise (i.e., spendthirft provisions, etc.)

Question 22

beneficiary invasion of trust principal

Answer 22

an income beneficiary is only entitled to trust income UNLESS trust authorizes otherwise.

if a beneficiary will eventually receive the trust principal, a court may permit invasion unless it is contrary to settlor intent or adversely affects other beneficiaries.

a court may permit invasion if it is in the best interest of beneficiaries or for the maintenance or support of the beneficiaries.

a trustee cannot use trust property to pay income of beneficiaries when trust income is insufficient unless there is an express or implied power of invasion

Question 23

judicial modifications of trust

Answer 23

cy pres doctrine (charitable trust only)

deviation: trustee and beneficiaries can request the court permit deviation or modify terms of trust if continuing the trust is impracticable or wasteful and the modification furthers the trust purpose b/c of unanticipated circumstances

common law: only administrative provisions can be modified

UTC: dispositive provisions may be modified when circumstances arise that were not anticipated

Question 24

modification of trust by parties

Answer 24

maj: a trust is generally irrevocable and cannot be modified unless settlor retained the right to do so in terms of trust.

minority of courts hold settlor is free to modify or revoke the trust instrument unless otherwise stated

UTC: trust can be modified:

1. by settlor, unless expressed otherwise
2. if settlor and beneficiaries consent
3. beneficiaries consent and modification is consistent with purpose
4. modification will further trust purpose b/c of unanticipated circumstances
5. court determination that value of trust is insufficient for administration and all beneficiaries are notified
6. necessary to conform to settlor intent

Question 25

termination of trust

Answer 25

1. trust is revoked or expires pursuant to terms 2. material purpose has been satisfied or becomes unlawful, against pub policy, or impossible 3. settlor and all beneficiaries agree to terminate 4. all beneficiaries agree AND no material purpose for trust remain 5. termination will further the purpose of the trust due to circumstances that were not foreseen by settlor or 6. court or trustee determine value of property is too low to justify costs of administration if trust is terminated, property vests in beneficiaries who may distribute property in any manner they choose. trustee may retain reasonable amount of property to cover debts, expenses, or taxes

Question 26

fiduciary duty of trustee

Answer 26

trustee must manage property exclusively for benefit of all the trust beneficiaries and administer the trust in good faith pursuant to the terms and purposes of the trust includes: 1. duty of care 2. duty of loyalty 3. duty to act impartially 4. duty to administer trust according to terms 5. separate and earmark property 6. preserve and make trust property productive

Question 27

duty of care

Answer 27

1. duty to exercise the degree and skill as a person of ordinary prudence would exercise in dealing with his own property - focus on conduct, not results of conduct 2. Uniform Prudent Investor Act (UPIA) requires trustee to exercise the care and skill as an investor of ordinary prudence would exercise in investing his own property (diversify, avoid risky investments, avoid speculation)

Question 28

exculpatory clause

Answer 28

maj: settlor may limit the potential liability of trustee by including an exculpatory clause in trust; however, these do not excuse bad faith

Question 29

conflict of interest

Answer 29

duty of loyalty a transaction is presumed to be affected by conflict of interest if entered into by trustee spouse or heirs, agent or attorney of trustee, or an entity that trustee has an interest in that might affect trustee best judgment No further inquiry rule: a transaction entered into by trustee for trustee own benefit is automatically presumed to be a conflict of interest. it is voidable without further inquiry if it involves a person who has close business relationship or personal relationship with trustee, the presumption is rebuttable if trustee shows the transaction was not affected by any conflict

Question 30

duty of loyalty

Answer 30

trustee owes duty of loyalty to beneficiaries where the trustee may not obtain personal gain from administering the trust, except for fees self-dealing: self-dealing is a per se breach of loyalty. includes any transaction involving trust property that trustee enters into for his own gain. may be excused where approved by court, beneficiary did not commence action within required time, beneficiary consented, or transaction occurred before the person became trustee waiver: settlor may expressly waive duty of loyalty in trust instrument. waiver does not exclude bad faith

Question 31

duty of to act impartially

Answer 31

must be impartial to all beneficiaries when investing, managing, and distributing property

Question 32

newly acquired assets that must be allocated to trust income

Answer 32

receipt of rental payments from trust property and corporate distributions

Question 33

newly acquired assets that must be distributed to trust principal

Answer 33

funds received from sale of property and repayment of loan principal

Question 34

power of appointment

Answer 34

conveyed by will or trust from donor to donee granting the right to appoint or distribute property left by donor. the holder of POA does not receive full title to property, only the power to appoint or distribute

Question 35

general power of appointment

Answer 35

granted when donor does not leave any restrictions as to appointment of the property - thus, POA is free to appoint property to himself, creditors, or any other he chooses

Question 36

special power of appointment

Answer 36

donor leaves restrictions on the appointment of property. donee may not exercise a special POA for his own benefit

Question 37

POA via general residuary clause

Answer 37

POA may be exercised in general residuary clause only if the power of appointment is general power or testator will manifests an intention to include the property subj to the power

Question 38

acceleration

Answer 38

future interest may be accelerated, allowing future interest holder to take possession immediately if the present interest holder loses title or legal right to property or disclaims the property

Question 39

disclaimer by beneficiary

Answer 39

o No one can be compelled to accept an interest in trust – a beneficiary may disclaim an interest in trust by filing a written instrument with the trustee within 9 months of the interest’s creation (assuming trustee has reached age 21)  Once disclaimed, it is treated as if beneficiary died o Estoppel: beneficiary can be estopped from making disclaimer if they have exercised any dominion or control over interest or accepted any benefits under trust o Disclaimants creditors: majority holds that a disclaimer relates back to the date of transfer for all purposes – a disclaimer by an insolvent beneficiary can be used to defeat creditor’s claims but not federal tax lien  Cannot disclaim if you have accepted any benefit

Question 40

removal of trustee

Answer 40

Grounds for removal o Serious breach of trust o Serious lack of cooperation among co-trustees o Unfitness, unwillingness, or persistent failure to administer or o A substantial change in circumstances A trustee can resign after acceptance by either o Giving 30 days’ notice to qualified beneficiaries, settlor (if living), and co-trustees or o Obtaining court approval

Question 41

testamentary trust - secret vs. semi-secret

Answer 41

trust created by settlor valid will Secret trust – constructive trust imposed o Secret trust – absolute gift in will made in reliance on the beneficiary promise to hold the property in trust for another  the settlor agrees with a will beneficiary that the beneficiary will hold the property in trust for someone else – and relies on beneficiary promise – but the will does not state the trust nature of the gift Semi-secret trust – resulting trust implied o Semi-secret trust – the will makes gift in trust but fails to name the beneficiary o The gift fails, and the named trustee holds the property on a resulting trust for the testator’s successors in interest o No extrinsic evidence allowed – trustee holds on resulting trust for testator’s legatees or heirs