Trusts

Question 1

Pour-Over Will

Answer 1

Testamentary device where the writer of a will creates a trust (in the will) and decree in the will that certain property shall be distributed to the trustee of the trust

Question 2

Honorary Trust

Answer 2

A trust that has no ascertainable beneficiary and confers no substantial benefit on society

Question 3

Totten Trust

Answer 3

The named beneficiary takes whatever is left in a tentative bank account trust at the death of the owner of the bank account.

Question 4

Spendthrift Trust

Answer 4

A restraint on alienation.
Beneficiary cannot transfer right to future payments of income or principal, and creditors cannot attach rights to future payments unless for necessaries (such as alimony or child support)

Question 5

Voluntary Alienation on Spendthrift:
Can the beneficiary ever voluntarily alienate or transfer his right to future payments, notwithstanding the spendthrift provisions?

Answer 5

Answer: No, as a general rule.
This would defeat the terms of the trust.

Þ But sometimes a court will recognize the assignment on the ground that the beneficiary merely has given the trustee a direction or order to pay the beneficiary’s agent or representative, i.e. the assignee.
→ In such case, prior to the time of payment, beneficiary would have the right to revoke the order or direction.

Question 6

Involuntary Alienation on Spendthrift:
Can creditors ever attach the beneficiary’s right to future payments, notwithstanding the spendthrift provisions?

Answer 6

Answer: No, as a general rule.
Common Law Exceptions:
Preferred creditors can attach the beneficiary’s right to future payments, notwithstanding the spendthrift provisions.
The key is that they are not typical creditors.

Question 7

Support Trust

Answer 7

Trustee is required to use only so much income as is necessary for the beneficiary’s health, support, and education and the terms of the trust must be specifically stated.

Question 8

Voluntary Alienation on Support Trust:
Can the beneficiary ever voluntarily alienate or transfer his right to future payments, notwithstanding the support trust provisions?

Answer 8

Answer: No. Why?
To allow any type of assignment would defeat the purpose of the trust and violate settlor’s intent.
Thus, beneficiary cannot transfer his right to future payments in a support trust.

Question 9

Discretionary Trust

Answer 9

Trustee is given sole and absolute discretion in determining how much, if anything, to pay the beneficiary, if ever.

Question 10

Can beneficiary ever transfer his interest, his right to future payments, notwithstanding the discretionary trust provisions?

Answer 10

(a) On one hand, no: Beneficiary cannot voluntarily transfer his right to future payments because, the question may be asked, what exactly is the beneficiary assigning?
The beneficiary may not get anything.
(b) But, on the other hand, if in fact there was an assignment, then the assignee steps into the shoes of the beneficiary.
Because the beneficiary could not force payment by the trustee, neither can the assignee.
However, if the trustee has notice of the assignment and does decide to pay, then the trustee must pay the assignee or be held personally liable.

Question 11

Can creditors ever attach the beneficiary’s right to future payments, notwithstanding the discretionary trust provisions?

Answer 11

(a) On the one hand, creditors cannot attach the beneficiary’s right to future payments because there is nothing to attach.
The trustee may never allocate anything to the beneficiary.
The beneficiary could not force payment, and neither can the creditors.
Thus, there is nothing to attach by the creditors.
(b) On the other hand, if the trustee has notice of the debt and the creditor’s judgment against the beneficiary, and the trustee does decide to pay, he must pay the creditors or be held personally liable.

Question 12

Resulting Trust

Answer 12

An implied-in-fact trust decreed by a court that is based on the presumed intent of the parties.

Question 13

Trustees Duties

Answer 13

• Duty of Loyalty - Administer for the benefit of the beneficiaries
• Duty to Invest - See Duty to Invest Card
• Duty to Earmark - Label trust property as trust property
• Duty to Segregate - No commingling of funds
• Duty not to delegate - May rely on professionals but not delegate decision making except, modernly can delegate management of money to a professional
• Duty to Account - Provide statements of income and expenses on a regular basis
• Duty of Care - Act as a reasonable person would in dealing with their own affairs
• Duty to defend - Trustee must defend actions that may result in a loss and enforce claims that are part of the trust property.
  Duty to Defend

Question 14

Resulting Trust is created when:

Answer 14

• Private Trust Fails for lack of beneficiary.
• Private Trust fails because of illegal purpose after creation.
• Charitable Trust Ends and Cy Pres cannot be used.

Question 15

Constructive Trust

Answer 15

A remedy to prevent fraud or unjust enrichment. The trustee’s sole obligation is to deliver the property to the intended beneficiary.

Question 16

Remedy for Breach of Trustee Duties

Answer 16

Damages
Remove Trustee
Constructive Trust Remedy
Tracing and Equitable Liens
Ratify the transaction if good for the beneficiary

Question 17

Constructive Trust is created when:

Answer 17

Trustee engages in self-dealing
Fraud/Undue Influence
Secret Trust
Oral Real Estate Trust

Question 18

Secret Trust

Answer 18

The will on its face makes a gift outright to A, but the gift is given on the basis of an oral promise by A to use the property for the benefit of B.

Question 19

Remedies of Beneficiary for Breach of Duties

Answer 19

1. Damages.
2. Constructive Trust remedy.
3. Tracing and Equitable Lien on property.
4. Ratify the Transaction if good for beneficiary.
5. Remove Trustee.

Question 20

Duty to Invest

Answer 20

There are three rules that courts may follow:

1) Common Law Prudent-Person Test: Must act as a reasonable person would managing their own funds. Requires examining each individual investment.

2) Uniform Prudent Investor Act (UPIA): Must invest as a “prudent investor.” Requires examining the portfolio as a whole (not each individual investment)

3) State Lists: Lists that trustees must follow in the absence of directions. Does not include investment in a new business or second deeds of trust in real estate. (Examples: Government bonds, first deeds of trust in real estate, sometimes stocks of public traded companies).

Duty to Diversify - All three rules require an investor to diversify the investments

Remedy: The trustee must recoup the loss

Question 21

Modification by the Settlor

Answer 21

Settlor can modify the trust if he expressly reserves the power to modify or revoke.

Question 22

Duty to Account Remedy

Answer 22

If there has been a breach of a duty to account then the beneficiary may file an action for accounting.

Question 23

Modification by Court

Answer 23

Court’s can modify a Charitable Trust under the Cy Pres Doctrine.

A court may prematurely terminate the trust when 1) the trust purpose has become impossible; or 2) under the doctrine of changed circumstances, when the circumstances unanticipated by the settlor authorize an equitable deviation from the trusts terms to achieve the trust purpose.

Question 24

Doctrine of Changed Circumstances

Answer 24

A court can change the administrative or management provisions of the trust, but not the beneficiaries. Unforeseen circumstances on the part of the settlor and the change must be necessary to preserve the trust.

Question 25

Termination of Revocable Trust

Answer 25

Majority Rule
Settlor must reserve power to revoke expressly in trust instrument.
Minority Rule
Settlor has the power to revoke, unless the trust is expressly made irrevocable.

Question 26

Termination of Irrevocable Trust

Answer 26

• Naturally
• Agreement between settlors and ALL beneficiaries
• Beneficiaries agree and material purposes have been accomplished
• By operation of law

Question 27

Allocation of Trust

Answer 27

Unless the trust itself state otherwise, trust assets are allocated as follows:

Beneficiaries: Entitled to income from interest, cash dividends, and net business income, but must pay interest on any loan debt, taxes, or minor reports.

Remainderman: Entitled to principal from the net proceeds on the sale of an asset stock dividends, profits from the sale of stock, but must pay the principal part of the loan debt and for major repairs.

Question 28

Uniform Principal and Income Act

Answer 28

Application of rules when a trust has both a life tenant and a remainder man to determine how income and expenses are calculated. Trustee can disregard these rules if doing so is necessary to allocate the trust fairly.

Question 29

Uniform Principal and Income Act: Life Tenant

Answer 29

The life tenant gets the following income:
1. Cash Dividends
2. Interest Income
3. Net Business Income

The life tenant’s interest pays for the following expenses:
1. Interest on loan indebtedness
2. Taxes
3. Minor repairs

Question 30

Uniform Principal and Income Act: Remainderman

Answer 30

Remainderman gets the following income:
1. Stock Dividends
2. Stock Splits
3. Net Proceeds on sale of a trust asset

Remainderman’s interest pays for the following expenses:
1. Principal part of loan indebtedness
2. Major repairs or improvements

Question 31

Trustee Duties to Third Persons - Contract Liability

Answer 31

Common Law: A trustee can be sued personally and his or her personal assets are vulnerable to suit, but they can get indemnification from trust assets if not personally at fault.

Modernly: If the other contracting party knows that the trustee is entering into the contract in his or her representative capacity, then the trustee can only be sued in his or her representative capacity.

Question 32

Trustee Duties to Third Persons - Tort Liability

Answer 32

Common Law: A trustee can be sued in personal capacity but if they are not at personal fault they can receive indemnification from trust assets.

Modern Law: A trustee can be sued in an individual capacity only if the trustee is personally at fault.

Question 33

Trust

Answer 33

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 the designated beneficiaries.

Question 34

Express Trust Creation

Answer 34

An express trust is created with the express intention of the owner of property. An express trust is created by: 1) inter-vivos declaration that the property is to be held in trust, 2) an inter-vivos transfer of property by the settlor during his or her lifetime, or 3) by will (testamentary trust).

Question 35

Valid Trust Purpose

Answer 35

A trust purpose is invalid if 1) it is illegal, 2) its performance requires a criminal or tortious act, or 3) it is otherwise contrary to public policy.

Question 36

Modification of an Express Trust

Answer 36

Trusts normally terminate when the trust purpose is accomplished. Generally, once a trust is created, a settlor may not revoke or amend a trust, unless such a right is expressly reserved.

Question 37

Trust potential calls of the question on the bar

Answer 37

Trustee’s breach of Fiduciary Duty
Distribution - Pour over, omitted spouse or child
Termination of trust

Question 38

Modification and Termination by trustee

Answer 38

A trustee has no power to terminate the trust except as provided in the trust

Question 39

Modification and Termination by beneficiary

Answer 39

Beneficiaries can compel modification or termination only when all beneficiaries consent and the modification or termination will not frustrate any material trust purpose (“The Claflin Doctrine”). Where the beneficiaries have a right to terminate, the settlor’s objection will not be a bar.

Question 40

Abatement

Answer 40

Arises if an estate lacks sufficient assets to pay the decedent’s debts as well as all devises.
○ As a result some devises must be abated or reduced.
* In the absence of an indication in the will of how devises should abate, devises ordinarily abate in the following order:
○ 1. Residuary devises are reduced first
○ 2. General devises are reduced second
○ 3. Specific and demonstrative devices are the last to abate and are reduced pro rata.
The plan is believed to follow testator’s intent. the order of abatement is based on classification of the gifts

Question 41

Intervivos Trust by Declaration

Answer 41

When an Inter-Vivos Trust is created by declaration, and the settlor is also the trustee, then no delivery of the trust property is required. However, then the trustee is another person, then delivery is required. Intervivos Trusts can be revocable. Delivery means act that places the trust property out of the settlor’s control.

Question 42

Intervivos Trust by Transfer of Property

Answer 42

This trust is created when the trustee takes legal title upon delivery of the deed or the property itself.

Question 43

Testamentary Trust

Answer 43

When a trust is created in a will, the intent to create a trust must be obvious through either: 1) the face of the will; 2) in the documents incorporated into the will; 3) through acts of independent significance; 4) through the power of appointment

Question 44

Valid Express Trust

Answer 44

A valid express trust contains: 1) a trustee; 2) trust res; 3) a settlor; 4) a valid purpose; 5) the intent to create a trust; and 6) a beneficiary.

Parties: Settlor, Beneficiary Trustee
Property: Res
Purpose: Valid Purpose
Intent: to create trust

Question 45

Trustee

Answer 45

A trustee is a person who holds title to the trust property and is bound by a fiduciary relationship. The trustee must have actual duties to the beneficiary.

Question 46

Trust Property

Answer 46

Where there is no trust property, the trust fails since the trustee has no property to manage. The property can be real or personal, tangible or intangible, vested or contingent, but must exist at the time the trust is created.

Question 47

Settlor

Answer 47

Settlor is the creator of the trust

Question 48

Intent to Create a Trust

Answer 48

A settlor’s intent to create a trust may be manifested by a writing, verbal communication or conduct.

Question 49

Beneficiary

Answer 49

A definite beneficiary is a necessary component of ever trust because a trust must have someone to enforce it. If a trust fails for lack of definite beneficiary, a resulting trust in favor of the beneficiary will result.

Question 50

Types of Trusts (13)

Answer 50

Charitable
Constructive
Discretionary
Honorary
Inter-Vivos
Life Insurance
Pour-Over
Revocable Inter-Vivos
Secret
Spendthrift
Support
Testamentary
Totten

Question 51

Trust Administration Duties

Answer 51

Duty not to encumber from or borrow from trust;
Duty to exercise care, skill, and prudence in managing;
Duty to avoid self dealing;
Duty to diversify trust assets;
Duty to earmark assets;
Duty to follow instructions;
Duty to supervise agents

Question 52

Trust Essay Approach

Answer 52

1) Validity of Trust
2) Type of Trust
3) Fiduciary Duties
4) Modification/Termination of Trust

Question 53

Pretermitted Child/Spouse

Answer 53

A child/Spouse is pretermitted if (born/adopted or for spouse- married) after all testamentary instruments are executed and they are not provided for in any instrument. Remedy: Child takes intestate share of estate.

Question 54

Exceptions to omitted spouse

Answer 54

Testator’s failure to provide was intentional based on the instrument;
Spouse was provided for in alternative means;
Spouse signed a waiver voluntarily relinquishing right

Question 55

Exceptions to omitted child

Answer 55

Testator’s failure to provide was intentional based on the instrument;
At execution, the decedent had one or more children and transferred substantially all under the will or trust to the parent of the omitted child;
Child was provided for outside of the instrument

Question 56

Charitable Trust

Answer 56

Any trust which confers a substantial benefit onto society.

Question 57

Cy Pres

Answer 57

Settlor has general charitable intent and the mechanism for effectuating that intent is not practicable or possible. The Court can modify the mechanism in order to effectuate the settlor’s general intent.