Trusts Flashcards
1
Q
Definitions
A
UTC = Uniform Trust Code
UPC = Uniform Probate Code
UTATA = Uniform Testamentary Additions to Trusts Act
2
Q
Valid Express Trust Formation
A
- definitive beneficiary
- settlor with capacity
- intent to create a trust
- a trustee
- valid trust purpose
- trust property; and
- compliance with state formalities
3
Q
Trustee
A
A person cannot be the sole trustee and sole beneficiary
A court will appoint a trustee if one is not named in the instrument.
4
Q
Beneficiary
A
Can be a person, corporations, or organizations
5
Q
Precatory Language
A
Words such as “hope” or “request” that only express settlor’s desire, NOT intent, and do not create a valid trust or legal obligation.
6
Q
Future Promises
A
A promise to create a trust in the future is unenforceable unless the promise is a valid contract.
7
Q
Revocable & Irrevocable Trusts
A
Majority view/UTC > revocable by default unless trust states otherwise
Minority view > irrevocable by default unless the trust states otherwise
UTC adopted by 35+ states.
8
Q
Testamentary Trust
A
Created by provisions in a settlor’s will. Does not take effect until settlor’s death.
9
Q
Testamentary Trust Creation
A
- Will must state essential trust terms (beneficiaries, purpose, & trust property); AND
- intent must be found from either: (1) express terms of the will; or (2) by a document/writing incorporated by reference
Writing must have been in existence when the will was executed.
10
Q
Pour-Over Provision in a Will
A
When a Will gifts property to a previously established inter vivos trust
Revocation/Termination of trust before death lapses the gift.
11
Q
What is a charitable trust?
A
Confers a substantial benefit to society
12
Q
Beneficiaries of a Charitable Trust
A
May be indefinite or a class of persons
13
Q
Does the Rule Against Perpetuities apply to Charitable Trusts?
A
No.
14
Q
Does the failure to state a specific purpose invalidate a charitable trust?
A
No. The court will select one.
15
Q
Illusory Trust
A
When settlor retains significant control over the trust property. Are invalid (lack of intent to create).
16
Q
Resulting Trust
A
Implied by law if a trust fails for lack of beneficiary.
Trust property returns to settlor’s estate.
17
Q
Discretionary Trust
A
When a trustee has absolute discretion and power to determine when/how much trust property is distributed to beneficiaries, but this exercise must be in good faith.
18
Q
Support Trust
A
Trust directs trustee to pay the beneficiary as much income as necessary for beneficiary’s support.
19
Q
Pure Support Trust
A
Trustee has NO discretion in making payments.
20
Q
Discretionary Support Trust
A
Trustee has discretion if the trust contains an ascertainable standard in which the beneficiary can bring an action compel payment in accordance with that standard.
21
Q
How do Trust assets Pass?
A
According to the terms of the trust
22
Q
If a testamentary trust/distribution fails, how does the trust property pass?
A
Trust property passes either (1) under a residuary clause in a will; or (2) to the settlor’s heirs by instestacy (if no residuary clause in a will).
23
Q
Spendthrift Trust
A
Provision in a trust that prevents the transfer of a beneficiary’s interest in a trust
Valid only if restrains both voluntary and involuntary transfers
Spendthrift interest cannot be sold or assigned by income beneficiary.
24
Q
When can a creditor reach a beneficiary’s spendthrift interest?
A
Only when:
1. judgment creditor who provided services for protection of the beneficiaries’ interest in the trust;
2. creditor who furnished necessities (some states only);
3. order for child support/alimony;
3. claim by state or federal government (taxes/other); or
4. self-settled trust (where settlor retains an interest, i.e., revocable trust)
25
If no exception applies, when can a creditor collect from a beneficiary of a spendthrift trust?
**After** payment is made to the beneficiary from the trust.
26
When can a creditor compel a trustee of a discretionary trust to make a distribution?
**Never**, even if the discretion is express in the standard of distribution or if the trustee abused its discretion.
27
Can a court order for child/spousal support be paid from a discretionary trust?
**Yes**. For unpaid child/spousal support, the court may:
1. order a distribution to satisfy the judgment; **and**
2. direct the trustee to pay the child, spouse, or former spouse.
28
Can a beneficiary invade the trust principal?
Yes, if the beneficiary will eventually receive the trust principal, a court may permit invasion **unless** it is (1) **contrary** to the **settor's intent** or (2) **adversely affects** the other beneficiaries
29
Express/Implied Powers of Invasion of a Trust
A trustee **CANNOT** use trust property to pay income beneficiaries when trust income is insufficient **unless** there is an express or implied power of invasion (**derived from settlor's words or conduct**).
| Court may permit if it's in best interest of beneficiaries/for support
30
Modification of a Trust
by the Settlor
**Majority** > when expressly reserved the power to modify or has power to revoke or amend
**Minority** > free to amend or revoke unless the trust states otherwise
**UTC** > may be modified:
1. by the settlor (unless trust states otherwise)
2. if settlor and beneficiaries consent
3. if beneficiaries consent + modification is not inconsistent with trust purpose
4. if it will further the trust purpose because of unanticipated circumstances
5. if cy pres doctrine applies
6. if the court determines the value is insufficient to justify administration + notice to all beneficiaries; or
7. necessary to conform the trust to settlor's intent
31
Equitable Deviation Doctrine
Court may modify trust terms if:
1. continuing the trust is **impractical or wasteful**; and
2. the **modification furthers the trust purpose** because of **unanticipated** circumstances
| **Common Law** > may only modify administrative provisions
## Footnote
**UTC** > dispositive provisions may be modified for unanticipated circumstances.
32
Additions Clause
Gives trustee **power to accept/reject additions to trust property** from settlor or any other person
33
UTC Termination of a Trust
1. if **revoked/expires** pursuant to terms
2. **material purpose** is achieved;
3. becomes **unlawful/contrary to public policy/or impossible to achieve**
4. **settlor + all beneficiaries** consent
5. **all beneficiaries consent** + **court decides** continuance is not necessary to achieve trust purpose
6. termination will **further trust purpose** because of unexpected circumstances
7. **cy pres doctrine** applies; or
8. **value** of trust **insufficient** to justify cost of administration
34
Distribution upon Termination
Trustee shall proceed expeditiously to distribute trust property (may retain reasonable reserve for trust's expenses/debts/taxes)
If settlor/beneficiaries **consent** to trust termination, the beneficiaries may decide how to distribute trust property.
35
What conditions in trust/will provisions are VOID against public policy?
1. prohibiting a first marriage; and/or
2. requiring a divorce
| Treated as if the restriction was not imposed unless remarriage OR
## Footnote
the purpose is to take care of a person's daily needs until they are able to obtain such support through marriage
36
Trustee's Duty to Administer
Must continue to administer until the trust terminates
**Common law** > must act with care, skill, and prudence
**UTC** > must administer in (1) good faith (2) in accordance with trust purpose/terms; and (3) in the interests of trust beneficiaries
*Trustee must exercise his powers in good faith and in accordance with terms/purpose **even if** trustee granted broad range of discretion.
37
Trustee's Duty of Care
**Duty of Prudent Administration** > as prudent person would (reasonable care, skill, and caution)
**Duty to Take Control & Protect Trust Property** > must take reasonable steps to take control AND protect trust property
38
Trustee's Duty of Loyalty
(as to self-dealing)
Must administer solely in **interests of beneficiaries** and cannot engage in **self-dealing** unless an exception applies.
39
If a trustee engages in impermissible self-dealing, what is the result?
1. transaction is **voidable** by the affected beneficiary; **or**
2. beneficiary can seek **damages**
40
5 exceptions to Trustee
self-dealing
1. authorized by **trust terms**
2. approved by the **court**
3. beneficiary **did not commence judicial proceeding** in required amount of time
4. beneficiary **consented, ratified, or released** trustee of liability
5. transaction occurred **before the person became a trustee**
41
Trustee's Duty of Loyalty
(as to conflict of interest)
Transaction **presumed** to be affected by **conflict** if entered into by: trustee's spouse, descendants, siblings, parents, or their spouses, an agent or attorney of the trustee, **or** an entity that trustee has an interest in that **might affect trustee's best judgment**
42
No Further Inquiry Rule
Transaction entered into by trustee for trustee's own benefit **automatically presumed** to be a conflict, and is **voidable without further inquiry** (fairness and good faith is immaterial).
For a person who has a close business or personal relationship with trustee, the **presumption is rebuttable** if trustee shows transaction not affected by any conflict.
43
Duty of Loyalty
(to Act Impartially)
Must act impartially (when investing, managing, and distributing trust property) giving due regard to beneficiaries' respective interests.
**Cannot be influenced by personal favoritism or animosity**.
44
Trustee's Duty of Care
(to Test the Market)
Failure to test the market for potential buyers **may result in breach** of that duty of care.
45
Prudent Investor Rule
(Duty of Care)
Must exercise the **degree of care, skill, and prudence of a reasonable investor** investing his own property.
Must diversify assets, avoid risky investments, and keep trust assets productive (courts may look at the portfolio as a whole).
Exception for trust terms permitting risky investments.
46
Can a trustee delegate trust duties?
Yes, a trustee may delegate those duties and powers that a **prudent trustee would delegate** under the circumstances.
47
When delegating, a trustee must exercise reasonable care, skill, and caution in?
1. **selecting** an agent;
2. **establishing scope/terms** of the delegation; and
3. **monitor** the agent's performance and compliance
A trustee is **not liable** for an agent's actions if the above requirements are followed.
48
Trustee acting in accordance with Settlor's Wishes (in a **revocable** trust **during settlor's lifetime**)
Trustee owes duties **only** to the settlor
Trustee is **not liable** for acting in accordance with the settlor's wishes
49
Trustee acting in accordance with Settlor's wishes (**irrevocable** trust)
Trustee owes duties to **settlor AND beneficiaries**
Trustee **may be liable** for acting is accordance with settlor's wishes if it is to the **exclusion** of the beneficiaries.
50
Principal & Income Allocations by Trustee
State law normally controls how each is allocated
51
What should the trustee allocate to income?
1. **rental payments** from real/personal property
2. money received from entity (**cash dividends/interest/investments**); and
3. **ordinary** expenses/repairs
52
What should the trustee allocate to principal?
1. **proceeds** from sale of a **principal asset**
2. **all other property** received (other than money from an entity). and
3. **extraordinary** expenses/repairs
53
Wrongful invasion of trust assets by trustee
Trustee will be **liable for**:
1. **amount required to restore the value** of trust property/distribution; or
2. **any profit made** by trustee from the breach
54
When can a remainderman beneficiary receive trust property?
Not until **termination** of the trust
55
Representation of Remainderman
A **minor, incapacitated, or unborn** person may be represented by a person with a **substantially identical interest** UNLESS:
(1) already represented; or
(2) a conflict of interest exists
56
Do anti-lapse statutes apply to trusts?
In most states, no.
57
Substitute Takers in a Trust
A substitute gift is created in the deceased beneficiary's surviving descendants if:
1. the beneficiary of a future interest does not survive the distribution date; **AND**
2. an anti-lapse statute applies
**UPC** > if the gift is **not a class gift**, a substitute gift is created in the surviving descendants
**UPC** > if the gift is a **single generation class gift**, a substitute gift is created in the surviving descendants of any deceased beneficiary
58
Vested Remainder in a Trust
An interest with **no contingencies or conditions on survivorship** pass to heirs if the person dies before interest become possessory and are devisable.
**Common law** > if a remainder person dies before a life tenant, a vested remainder interest will pass to the remainder person's heirs. If no heirs, passes to the person's estate. (Exception for survival provision in the trust)
59
Conditions on Survivorship for Vested Interests
**Common law** > a condition of survivorship on future interests in a trust is not implied
**UPC** > such condition is implied
60
Acceleration of Future Interests
**May be accelerated** (take possession immediately) **if** the **present** holder:
1. **loses** his **legal right** to the property; or
2. **disclaims** his interest (unless the distribution would harm a beneficiary/potential beneficiary or the trust terms limit acceleration)
61
Rule Against Perpetuities (RAP)
Common law > a **gift must vest** within a **life in being** at the **time of the grant plus 21 years** (invalidates a gift that will not actually vest or hypothetically vest in that time period)
62
When does a gift vest for purposes of RAP?
1. the **class closes**; and
2. all **conditions** for every member of the class **are satisfied**
63
Modern Modifications to RAP
1. **Wait and See Approach** (some states) > to see if a gift actually vests with 21 years of death of a life in being at time the interest was created;
2. **Reduction of Age Contingencies** (some states) > by statute, any age contingency that violates the rule is reduced to 21 years; or
3. **RAP abolished** (some states) > have abolished the RAP by statute
64
What is Power of Appointment?
When a testator/settlor gives another person the **power to decide where and to whom the property will go**.
**Donor** = testator/settlor
**Donee** = person who has the power of appointment
65
General Power of Appointment
When donor leaves **no conditions or restrictions** for the appointment of property by donee
66
Testamentary Power of Appointment
Can **only** be exercised in **donee's will** and according to **donor's conditions**
67
Effectively exercising a power of appointment in an instrument
ONLY if:
1. **instrument is valid** under state law;
2. there's an **intent** to **exercise** the power & it's **consistent with** any **conditions**; and
3. the **appointment** is **permissible** (to a person/group authorized by the donor)
68
Exercise of Power in a General Residuary Clause
Most states > is **not exercised** unless a donee's **intent to exercise** the power is **referenced**
69
UPC approach to Exercise of Power in Residuary Clause
Expresses intent to exercise power only if:
1. the **will manifests intent to include property** subject to the power; or
2. the **power is a general power** and the **creating instrument does not contain a gift** if the power is not exercised
70
Finding intent with a Blanket Exercise Clause
**Most states** > **intent to exercise** a power is **presumed** with a blanket exercise clause
**Some states and UPC** > if donor required the power to be **exercised by an express/specific** reference, a blanket exercise clause is **not sufficient** to show intent
71
Special Power of Appointment
Donee may appoint property **ONLY** to those limited persons/groups **authorized by Donor**.
Donee **cannot appoint property** to himself, his estate, his creditors, or his estate's creditors.
72
Appointments to non-authorized persons/groups
are deemed **ineffective**.
If more than one appointment is made, the **ineffective appointment will not affect other valid** appointments.
**Ineffective appointments pass to** the **taker-in-default**. If **no** taker-in-default was designated by the **donor**, the property passes to the donee or donee's estate.
