Trusts

Question 1

Trust Formation

Answer 1

A valid express trust requires:
1) a definitive beneficiary;
2) a settlor with capacity;
3) intent to create a trust;
4) a trustee named (a trust will not fail when a trustee fails to act, dies, removed, resigned → court will appoint one);
5) a valid trust purpose;
6) trust property (a trust is not created until it receives valid property, but does not have to be contemporaneous with the signing); AND
7) compliance with any State formalities (i.e. signed in front of a notary).

Beneficiaries→can be natural persons, corporations, or organizations.
Trustee→a person CANNOT be the sole trustee AND sole beneficiary.

Question 2

Precatory Language & Future Promises

Answer 2

Precatory Language
→words such as “hope” or “request” that only express a settlor’s desire DO NOT create a valid trust or legal obligation.
− Specific settlor intent is required.

Future Promises→A promise to create a trust in the future is unenforceable UNLESS the promise is a valid contract (mutual assent, consideration, & no defenses to formation).

Question 3

Revocable & Irrevocable Trusts

Answer 3

Majority View / UTC→Revocable by default UNLESS the trust states otherwise.

Minority View → Irrevocable by default UNLESS the trust states otherwise.

− Irrevocable trusts cannot be modified or revoked (except in limited circumstances).
*UTC was adopted by 35+ states & is the majority view.

Question 4

Testamentary Trust

Answer 4

Created through the provisions of a settlor’s will, and does not take effect until settlor’s death.
− Creation→
(1) will must state the essential trust terms (beneficiaries, purpose, & trust property); AND
(2) intent must be found from (a) the express terms of the will, or (b) incorporation by reference of a document/writing in existence at the time the will was executed.

Question 5

Pour-Over Provision

Answer 5

When a Will gifts property to a previously established trust.
− A pour-over provision DOES NOT create a trust. It MUST be connected with a previously created inter vivos trust (a trust created during testator’s lifetime).

− Revocation or termination of the trust BEFORE testator’s death causes the gift to lapse ***

Question 6

Charitable Trust

Answer 6

A trust that confers a substantial benefit to society.
− Beneficiary→may be indefinite or a class of persons.
− Rule against perpetuities DOES NOT apply.
− Failure to state a specific trust purpose or beneficiary DOES NOT make the trust fail – instead the court will select one.

Question 7

Illusory Trust

Answer 7

When the settlor retains significant control over the trust property indicating lack of intent to create a trust.
− Illusory trusts are deemed INVALID.
− Example→settlor retains a right of withdrawal and names himself the sole trustee.

Question 8

Resulting Trust

Answer 8

An EQUITABLE REVERSION that arises by operation of law whenever a person has created an express intentional trust, but the express trust fails or does not completely dispose of the trust property.

When this occurs, the undisposed property goes back to the settlor in a resulting trust.

Question 9

Discretionary Trust

Answer 9

when the trustee has absolute discretion and power to determine when and how much of the trust property is distributed to the beneficiaries.
− Trustee’s exercise of discretion MUST be in good faith (court will only interfere if the trustee is abusing their power).

Question 10

Support Trust

Answer 10

A trust directing the trustee to pay the beneficiary as much income as is necessary for the beneficiary’s support.

Pure Support Trust→Trustee has NO discretion.

Question 11

Discretionary Support Trust

Answer 11

→Trustee has discretion.
If it contains an ascertainable standard→a beneficiary may bring an action to compel the trustee to make payments in accordance with that standard.

Question 12

How Trust Assets Pass

Answer 12

Trust assets pass according to the terms of the trust.
− If a testamentary trust/distribution fails, the trust property passes: (a) under a residuary clause in a will; OR (b) to the settlor’s heirs by intestacy (if no applicable residuary clause).

Question 13

Cy pres Doctrine

Answer 13

A court may modify a charitable devise “as near as possible” with the settlor’s intent if the purpose of the trust/bequest is frustrated.

-ONLY APPLIES if the testator had a general charitable intent.
-Frustrated = it becomes impracticable, impossible, or wasteful.

Question 14

Spendthrift Trust

Answer 14

A spendthrift provision prevents the transfer (sell or assign) of a beneficiary’s interest in a trust.
− Valid ONLY IF it restrains both voluntary and involuntary transfers.
▪ Spendthrift trusts DO NOT provide protection for mandatory distributions of trust property.

Question 15

A creditor CANNOT reach a beneficiary’s spendthrift trust interest, EXCEPT:

Answer 15

a) Judgment creditor who provided services for the protection of a beneficiary’s interest in the trust;
b) Creditor who furnished necessities (in some states only);
c) Order for child support or alimony;
d) Claim by a state or federal govt. (i.e. federal tax liens); OR
e) Self-settled trust (where settlor retains an interest – i.e. a revocable trust).

Question 16

Spendthrift Provision (creditor collect)

Answer 16

Creditor can only collect from the beneficiary AFTER a payment is made unless an exception applies (see above).

Prevents beneficiary from using a future distribution to secure credit.

Question 17

Discretionary Trust
Creditor compel a distribution?

Answer 17

A creditor CANNOT compel a distribution subject to the trustee’s discretion, even if:
a) discretion is expressed in the form of a standard of distribution; OR
b) the trustee abused their discretion.

Question 18

Discretionary Trust & Child/Spousal Support

Answer 18

→If a judgment or order exists for unpaid child/spousal support, the court may:
▪ Order a distribution to satisfy the judgment, and
▪ Direct the trustee to pay the child, spouse, or former spouse.

Question 19

Invasion of Trust Principal

Answer 19

→If a beneficiary will eventually receive trust principal, a court MAY permit invasion UNLESS it:
a) is contrary to the settlor’s intent; OR
b) adversely affects the other beneficiaries.

Question 20

Express / Implied Powers of Invasion

Answer 20

→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).

A court may also permit invasion if:
a) it’s in the best interests of the beneficiaries; OR
b) for the maintenance and support of the beneficiaries.

Question 21

Modification of a Trust

Answer 21

Majority View→Trust can only be modified by the settlor who:
a) expressly reserved the power to modify the trust; OR
b) has the power to revoke or amend the trust.

Minority View→Settlor is free to amend or revoke a trust UNLESS the trust states otherwise.

Question 22

Uniform Trust Code (UTC) regarding Modifications

Answer 22

→A trust may be modified in the following instances:
a) by the settlor (unless trust provides otherwise);
b) if settlor and beneficiaries consent;
c) the beneficiaries’ consent + modification is not inconsistent with the trust purpose;
d) it will further the trust purpose because of unanticipated circumstances;
e) the cy pres doctrine applies;
f) court determines the value of the trust is insufficient to justify its administration + notice to all beneficiaries; OR
g) it’s necessary to conform the trust to the settlor’s intent.

Question 23

Equitable Deviation Doctrine

Answer 23

A court may modify the terms of a trust if:
1) continuing the trust is impractical or wasteful; AND
2) the modification furthers the trust purpose because of unanticipated circumstances.

Common Law→ONLY administrative provisions may be modified.

UTC→dispositive provisions may be modified when circumstances arise that were not anticipated by the settlor.

Question 24

Additions Clause

Answer 24

Gives a trustee the specific power to accept or reject additions to the trust property from a settlor or any other person.

Question 25

Termination of a Trust

Answer 25

Under the UTC, a trust may be terminated if:
a) it’s revoked or expires pursuant to its terms;
b) it’s material purpose is achieved;
c) it becomes unlawful, contrary to public policy, or impossible to achieve;
d) the settlor + all beneficiaries consent;
e) all beneficiaries consent + court decides that continuance is not necessary to achieve any trust purpose;
f) termination will further the purpose of the trust because of unexpected circumstances;
g) the cy pres doctrine applies; OR
h) the value of the trust is insufficient to justify the cost of administration.

Question 26

Distribution Upon Termination

Answer 26

Upon termination, the Trustee shall proceed expeditiously to distribute the trust property.
− Trustee may retain a reasonable reserve to pay trust debts, expenses, and taxes.
The beneficiaries may decide how trust property is distributed if the trust is terminated by grounds (d) or (e) above.

Question 27

Conditions that Prohibit Marriage / Require Divorce

Answer 27

The following trust/will provisions are VOID against public policy:
a) prohibiting a first marriage; and/or
b) requiring a divorce.
*Will be treated as if the restriction was NOT imposed.

BUT, a restraint on marriage will be upheld if:
a) it’s a restraint on re-marriage; OR
b) the purpose is to take care of a person’s daily needs until they are able to obtain such support through marriage.

Question 28

Duty to Administer the Trust

Answer 28

Trustee MUST continue to administer the trust until it terminates.
− Common Law→Trustee owes the beneficiaries the duty to act with care, skill, and prudence.
− UTC→Trustee must administer the trust: (1) in good faith; (2) in accordance with the trust purpose and terms; AND (3) in the interests of the trust beneficiaries.

Question 29

Duty of Care

Answer 29

Duty of Prudent Administration→Trustee must administer the trust as a prudent person would.
− MUST exercise reasonable care, skill, and caution.
Duty to Take Control & Protect Trust Property → Trustee must take reasonable steps to take control AND protect the trust property (i.e. obtain fire/casualty insurance).

Question 30

Self-Dealing (Duty of Loyalty)

Answer 30

Trustee must administer the trust solely in the interests of the beneficiaries.
− CANNOT engage in self-dealing.
If Trustee engages in self-dealing:
a) The transaction is voidable by the beneficiary affected; OR
b) Beneficiary can seek damages.

Question 31

Five Exceptions where Self-Dealing is Allowed

Answer 31

1) Authorized by the trust terms.
2) Approved by the court.
3) Beneficiary did not commence a judicial proceeding within the required time.
4) Beneficiary consented, ratified, or released the trustee of liability.
5) Transaction occurred before the person became a trustee.

Question 32

Conflict of Interest (Duty of Loyalty)

Answer 32

A transaction is presumed to be affected by a conflict of interest if entered into by:
a) Trustee’s spouse;
b) Trustee’s descendants, siblings, parents, or their spouses;
c) Agent or attorney of the trustee; OR
d) An entity that trustee has an interest in that might affect the trustee’s best judgment.

Question 33

No Further Inquiry Rule

Answer 33

→A transaction entered into by trustee for the trustee’s own benefit is automatically presumed to be a conflict of interest.
− It is voidable without further inquiry (fairness or good faith is immaterial).
− For a person who has a close business or personal relationship with the trustee, the presumption is rebuttable if the trustee shows the transaction was not affected by any conflict.

Question 34

Duty to Act Impartially (Duty of Loyalty)

Answer 34

Trustee MUST act impartially (when investing, managing, & distributing trust property) giving due regard to the beneficiaries’ respective interests. Trustee CANNOT be influenced by personal favoritism or animosity.

Question 35

Failure to Test the Market (Duty of Care)

Answer 35

Trustee’s failure to test the market for potential buyers may result in a breach of the duty of care.

Question 36

Investments & Prudent Investor Rule (Duty of Care)

Answer 36

Trustee 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 the trust assets productive.

Question 37

Delegation of Trust Duties

Answer 37

A trustee MAY delegate duties and powers that a prudent trustee would delegate under the circumstances.
If a trustee delegates a duty, he MUST exercise reasonable care, skill, and caution in:
1) Selecting an agent;
2) Establishing the scope and terms of the delegation; AND
3) Monitoring the agent’s performance and compliance.

*A trustee is NOT liable for an agent’s actions if the above requirements are followed.

Question 38

Trustee Acting in Accordance with Settlor’s Wishes Revocable Trust

Answer 38

→Trustee owes duties only to the settlor (during settlor’s lifetime).
− Trustee is NOT liable for acting in accordance with the settlor’s wishes.

Question 39

Irrevocable Trust

Answer 39

→Trustee owes duties to the settlor and the beneficiaries.
− Trustee MAY be liable for acting in accordance with the settlor’s wishes, if it’s to the exclusion of the beneficiaries.

Question 40

Principal & Income Allocations

Answer 40

Trust receipts and disbursements are allocated to either principal or income.
− State law normally controls how each is allocated.

Allocated to Income→(1) receipt of rental payments from real/personal property; (2) money received from an entity (cash dividends, interest on investments); and (3) ordinary expenses and repairs.

Allocated to Principal→(1) proceeds from the sale of a principal asset; (2) all other property received – other than money received from an entity; and (3) extraordinary expenses and repairs.

Question 41

Damages for Wrongful Invasion of Trust Assets

Answer 41

A trustee who wrongfully invades trust assets is liable for the greater of:
a) the amount required to restore the value of trust property and distributions; OR
b) any profit made by the trustee from the breach.

Question 42

Remainder Beneficiary of a Trust (a.k.a. remaindermen)

Answer 42

Not entitled to receive trust property UNTIL termination of the trust.

Question 43

Representation of Remaindermen

Answer 43

A minor, incapacitated, or unborn person MAY be represented by a person with a substantially identical interest UNLESS:
a) already represented; OR
b) a conflict of interest exists.

Question 44

Substituted Takers

Answer 44

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.
*Most States→anti-lapse statutes do not apply to trusts.

UPC→If a beneficiary of a future interest DOES NOT survive the distribution date, the following applies:
If the gift is not a class gift→a substitute gift is created in the surviving descendants.
If the gift is a single generation class gift (i.e. “children”)→a substitute gift is created in the surviving descendants of any deceased beneficiary.

Question 45

Vested Remainder

Answer 45

is an interest where there are no contingencies or conditions on survivorship.
− Pass to that person’s heirs if the person dies before the interest becomes possessory.
− 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, the interest passes to the person’s estate.
− Exception→If a survival provision is in the trust.

Question 46

Vested Interests: Condition on Survivorship Common Law

Answer 46

→a condition of survivorship on future interests in a trust is NOT implied.
UPC→such condition IS implied.

Question 47

Acceleration of Future Interests

Answer 47

A future remainder interest may be accelerated (take possession immediately) if the present holder:
a) loses his legal right to the property; OR
b) disclaims his interest (unless the distribution would harm a beneficiary/potential beneficiary or the trust terms limit acceleration).

Question 48

Powers of Appointment

Answer 48

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 power of appointment.

Question 49

General Power of Appointment

Answer 49

→When Donor leaves NO conditions or restrictions for the appointment of property.
Testamentary Power of Appointment→Can only be exercised in donee’s will and according to donor’s conditions.

Question 50

Exercising a Power of Appointment

Answer 50

→The power is effectively exercised in an instrument ONLY IF:
1) the instrument is valid under state law;
2) an intent to exercise the power & it’s consistent with any conditions; AND
3) the appointment is permissible – it’s to a person/group authorized by the donor.

Exercise of a Power in a General Residuary Clause: Most States→is NOT exercised unless donee’s intent to exercise the power is referenced.

Question 51

UPC→expresses intent to exercise the power ONLY IF:

Answer 51

a) the will manifests intent to include property subject to the power; OR
b) the power is a general power and the creating instrument does not contain a gift if the power is not exercised.

Question 52

Finding Intent with a Blanket Exercise Clause

Answer 52

Most States→intent to exercise a power is presumed with a blanket exercise clause.
Some States & UPC→If donor required the power to be exercised by an express/specific reference, a blanket exercise clause is NOT sufficient to show intent.

Question 53

Special Power of Appointment

Answer 53

The donee may appoint property ONLY TO those limited persons/groups authorized by the donor.
− Donee CANNOT appoint property to himself, his estate, his creditors, or his estate’s creditors.

Question 54

Ineffective Appointments

Answer 54

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.

Question 55

Rule Against Perpetuities (RAP)

Answer 55

Under the common law, a gift must vest within a life in being at the time of the grant plus 21 years.
− Invalidates any gift that will not actually vest or hypothetically vest within that time period.

Question 56

Vesting of Class Gifts

Answer 56

A class gift vests under RAP
1) the class closes; AND
2) all conditions for every member of the class are satisfied.

Question 57

Modern Modifications to RAP

Answer 57

− Wait and See Approach (some states)→A gift is valid if it actually vests within 21 years after the death of a life in being at the time the interest was created. The court waits to see if the interest will actually not vest.

− Reduction of Age Contingencies (some states)→By statute, any age contingency that violates the rule is reduced to 21 years.

Question 58

What is a trust?

Answer 58

• a fiduciary relationship in which one party, known as the settlor, gives another party, the Trustee, the right to hold title to the property or assets for the benefits of a third party, the beneficiary.