Trusts

Question 1

Trust definitions

Answer 1

A trust is a fiduciary relationship between the trustee and the trust beneficiaries. When a trust is created the title to property is divided between legal and equitable title.
1. The trustee holds legal title to the property and becomes the property owner of record for the property.
2. The beneficiary holds equitable title to the property and is entitled to the financial benefits of the property.
There are three main parties involved in the creation of a trust
1. the settler is the person who creates the trust. It is usually the person who places the original assets into the trust.
2. The trustee is the person who holds the assets of the trust for the benefit of the beneficiaries. The trustee manages the trust and its assets under the terms of the trust.
3. The beneficiary is the person who is entitled to the assets or profits of the trust.

Settlor – creates trust
Trustee – holds assets of the trust
Beneficiary – the person entitled to the assets of the trust.

Question 2

Types of Trusts

Answer 2

Trusts are classified as either expressed or implied:

An express trust is created when a person has the intent to create a trust and complies with the requisite formalities to create that trust.

An implied trust is created by conduct regardless of whether there is intent to create a trust.

express = intent + compliance with formalities
implied = conduct

Question 3

Express Trust

Answer 3

A valid express trust is created if the following five elements are met:
1. the settler has an intent to create the trust;
a. the settlers intent may be determined by written or spoken words or conduct. There are no specific words required to create a trust. The settler need only intend to create the legal relationship and duties of a trust.
b. Precatory language merely expresses the settlers wishes regarding his property not his intent. Example, I convey green acre to Tom with the hope that Tom eases it for the benefit to Ben.
c. The settler must have capacity (authorized authority or requisite mental state) in order to create a trust.
2. There is trust property
a. the res refers to the property that makes up the trust as a whole period just about anything that can be owned and transferred can make up the res;
b. the rez must either be:
i. civically described with certainty or
ii. ascertainable with certainty from the description of it.
3. And ascertainable beneficiary exists;
a. At the time of trust creation the settler must either
i. specifically identify the beneficiary by name or sufficiently describe how the beneficiary is to be I identified. Example my children is sufficient but my friends is not sufficient.

An express trust must show and intent to create a trust, there is trust property, an ascertainable beneficiary exists, the trust has a trustee, and all parties comply with the requisite formalities.

Question 4

Revocability of Trusts

Answer 4

Under the common law a trust is irrevocable unless the settler expressly retains the right to revoke or amend the trust.

Under the uniform trust code a trust is revocable and less the trust expressly provides otherwise.

CL = trust irrevocable
UTC = trust is revocable unless expressly provided otherwise.

Question 5

Testamentary Trust

Answer 5

If testamentary trust is created through provisions of the settlers will and does not come into existence until the settler dies. They must meet the same formalities as well.

Question 6

Pourover Provisions

Answer 6

a pourover provision and a will devises property to a previously existing trust under the terms of that trust. A pour over provision is distinguishable from a testamentary trust, as a pour over provision does not create a trust; it transfers property to a trust already in existence. Therefore they pour over provision cannot devise property to a testamentary trust because the testamentary trust does not come into existence until the settler dies.

Pourover = transfer property to a trust
Cannot have a pourover provision for a testementary trust bc test trust does not come into exsistence until settlor has died.

Question 7

Charitable Trust

Answer 7

A charitable trust is a trust that has the purpose of accomplishing a substantial amount of social benefit to the public at large or to a reasonably large class.

The beneficiary of a charitable trust may be indefinite, named, or contain a class of persons described by the trust. The rule against perpetuities does not apply to Charitable Trusts.

A charitable trust will **not be invalidated **for failure to state a specific charitable purpose or beneficiary. Generally, courts will select a purpose or beneficiary that is consistent with the settlers intent if the settler had a general charitable intent.

The Cry Pres Doctrine may be applied to continue the charitable trust and a manner consistent with the settler’s general charitable intent.

However if the settler names the specific charitable beneficiary the trust will terminate upon the charities termination.

Question 8

Cry Pres Doctrine

Answer 8

Court can modify a trust if the trust’s charitable purpose is no longer
possible.

Example: Richie Rich conveys to the Hilly Flats School of the Arts in trust to support the school’s pottery program. Because of low enrollment, the school replaces the pottery program with a graphic design program. Using cy pres, the court can modify Richie Rich’s trust to support the new graphic design program.

To modify, you need a general charitable purpose
Goal is to make the new purpose as close as possible to the original purpose

RST and Uniform Trust Code presume a general charitable purpose o If there is no general charitable purpose, the property goes to a
resulting trust

Question 9

Supportive Trusts (2 kinds)

Answer 9

a support trust is a trust that contains A provision directing the trustee to pay to the beneficiary as much of the income or principal as is necessary to the beneficiaries education and support. Support trusts can be pure or discretionary.

Support = trust has provision directing trustee to support beneficiary (education)

Pure support trusts limit the trustees discretion. The trustee is obligated to spend only so much of the available trust property as is necessary for the education and maintenance of the beneficiary.
**
Pure support = trust has provision directing trustee to support ben by limited means necessary**

Question 10

Spendthrift Trust

Answer 10

Spend thrift trusts contain provisions designed to protect beneficiaries from their carelessness. Generally spendthrift provisions serve two main functions.
1. the beneficiary is not permitted to sell or assign his beneficial interest and
2. the beneficiaries’ creditors cannot reach the beneficiary’s beneficial interest.
However, creditors are generally able to reach the beneficiary’s beneficial interest if:
a. The settlor is the beneficiary of the spendthrift trust
b. The creditor is seeking reimbursement for providing necessaries or
c. The creditor has an order for child support or spousal support.

Spendthrift = designed to prevent carelessness, thus cannot assign or allow creditors access to interest.

Question 11

Creditors Rights

Answer 11

Creditors rights = beneficiary rights

If ben cannot receive TP, then creditors cannot receive TP

If no spenddrift prov (ie If ben cannot receive TP) , then creditors can reach beneficiaries by attachment of interest income. Generally creditors cannot go after the principal but they may go after the interest income if there are no spendthrift provisions.

Question 12

Power of Invasion

Answer 12

However, a trustee may be allowed to invade the trust principal;
1. Only beneficiary exists.
2. The beneficiary will similarly receive the trust (usually not without the settlors express directions in creating the trust).
3. There is a significant change in circumstances.
4. The trust gratins the trustee discretion to invade the principal.

Question 13

Cy Pres Doctrine Modificaiton

Answer 13

If it becomes unlawful impossible or impractical to carry out the purpose of a charitable trust the Cypress doctrine allows the court to modify the terms of the charitable trust as near as possible to the original intention of the settler in order to prevent the trust from failing. The Cyprus doctrine is applicable only if:
* property is placed in a trust for a terrible purpose that has become unlawful impossible or impractical to carry out; and
* and the settler manifested general charitable intent to devote the property to charitable purposes. The majority of courts presume general charitable intent.
o The absence of a reverter clause is evidence of the settlers general charitable intent. However, if there is a reverter clause the court will likely revert the trust property to the parties specified in the reverter clause when it becomes unlawful impossible or impractical to carry out the purpose of the trust.

Question 14

Court Modification of Trust (2 routes)

Answer 14

If modification, then deviation and Cy Pres doctrine may apply.
Deviation permissible if purposes of trust have been satisfied, become unlawful, or are impossible to carry out.
Modification permissible if it becomes unlawful, impossible, or impractical to carry out the purpose of the trust so that its intended purpose doesn’t die

Question 15

Modification of trusts by the parties

Answer 15

Majority Rule: trust is irrevocable and cannot be modified
Minority rule: revocable or modifiable w/o express authorization.

Question 16

Ways to terminate a trust

Answer 16

Revocation
Expirations
Material purpose satisfied or unlawful
Impossible to
Carry out

Question 17

fiduciary duty

Answer 17

Trustee, legal title holder of trust, has a fiduciary duty to manage exclusively and in good faith the trust for the benefit of beneficiaries.

Question 18

trustee duty of care

Answer 18

Exercise degree of ordinary prudence in dealing with own property. Focus is on conduct not results of conduct.
Majority view: Settlor can include exculpatory clause in trust to limit trustee’s legal liability. Trustee must still act in good faith.
Uniform Prudent Investor Act has same rule.

Question 19

Duty of Loyalty

Answer 19

The trustee owes a duty of loyalty to the beneficiaries where the trust may not obtain a personal gain from administrating the trust, except for fees.

Self-dealing:
Self-dealing is per se breach of the duty of loyalty.
Self-dealing includes any transaction involving the trust property that the trustee enters into for his own gain.
Waiver – the settlor may expressly waive the trustee’s duty of loyalty in the trust instrument. However, a waiver will not excuse the trustee for act done in bad faith.

Question 20

Duty of Impartiality

Answer 20

Duty to Act Impartial
The trustee possesses a duty to be impartial with respect to all the beneficiaries of the trust when investing

Question 21

Principal and Income Allocations

Answer 21

The following newly acquired assets generally must be to the trust income: (1) receipt of rental payments from trust property; and corporate distributions

The following newly acquired assets generally must be allocated to the trust principal: funds received from the sale of trust property; and
Repayment of loan principal.

Question 22

Fee Simple

Answer 22

Fee simple
In present estates, fee simple is the default estate. A fee simple is created when the grantor uses the following language;

O to A…
O to A and her heirs…
O to A forever…

Question 23

Defeasible Fees

Answer 23

Defeasible fee is a conveyance in fee simple in which the grantor places express conditions on the conveyance. A defeasible fee is capable of lasting forever but may be terminated by the occurrence of an event.

A defeasible fee gives the grantee a present possessory interest in the property but reserves a future interest in the property in the favor of the grantor or a third party. There are three main types of defeasible fees. FSD, FSCS, and FSEI.

Question 24

Fee Simple Determinable

Answer 24

1. Fee simple determinable - a fee simple determinable is a condition conveyance in which the grantor retains a possibility of reverter. The possibility of reverter thus automatically when the condition is not met. A few simple determinable is created when the grantor uses durational language such as;
   a. while the property is used for farming
   b. during the properties use as a farm
   c. until the property is no longer used as a farm

FSD = durational language, poss of reverter, terminationa automatic.

Question 25

Fee Simple Sub to Condition Subsequent

Answer 25

A few simple subject to condition subsequent is a conditional conveyance in which the grantor retains a right of entry. The right of entry does not vest automatically when the condition is not met. A fee simple subject to condition subsequent is created when the grantor uses conditional language such as
a. provided that the property is used for farming
b. on the condition that the property is used as a farm

FSCS = conditional language, right of enty, not automatic termination ( granotr must show intent to terminate by evication for example).

Question 26

Fee Simple Executory Interest

Answer 26

3. Fee simple subject to executory interest. A fee simple subject to executory interest is a conditional conveyance in which a third party is granted an executory interest in the property. An executory interest is a future interest that divests in earlier interest.
   a. For example O conveys green acre to A and his hiers, but if green acre is no longer used as a farm, then be to her heirs. A has a fee simple subject to executory interest. B has an executory interest because B is a third party and her interest divests A’s interest.

FSEI = executory interest in third party,

Question 27

Springing and Shifting Exec Interest

Answer 27

4. A springing executory interest divests the grantor while a shifting executory interest divests a prior grantee. O conveys green acre to A in his heirs, but if green acre is no longer used as a farm, than B to her heirs. B has a **shifting **executory interest because B’s interest divests A’s interests.

Springing = intertest divests from grantor to new grantee
Shifintg = interest divests from prior grantee to new granteee

Question 28

Life Estate

Answer 28

A life estate is the present possessory estate that is limited by a person’s life. A life estate is created when a grantor uses the following language:
O to a for A’s life
O to a for B’s life

Life estate that transfers back to grantor = reversion
Life estate that transfers to a third party = remainder (either vested or contingent)

Question 29

Vested and Contingent Remainder

Answer 29

The remainder can be vested or contingent

A vested remainder is a future interest that is both:
given to an ascertained grantee and
; not subject to a condition precedent.

A** contingent remainder** is a future interest that fails either of the two above elements for example.

O conveys green acre to A for life then to a first born child. At the time of conveyance, A has no children. A first born child has a contingent remainder because the first born child is not an ascertainable grantee.

O conveys green acre to A for life then to be on the condition that B survives A. B has a contingent remainder. B is an ascertainable grantee however B’s interest is subject to a condition precedent.

Question 30

Appointing Property

Answer 30

The appointer of property in a trust does not receive full title to donors property, only the power to appoint or distribute.

General Appointment = donor makes no restrictions
Special = donor leaves restrictions of appointment

Look for a general residuary clause in will = it will say who is left to appoint property. However it can only be general power (no retrictions)

Question 31

Acceleration of Interest in Property

Answer 31

Future interest holder can immediately take possession of while present holder still has interest if he loses title or legal right or disclaims property.

Question 32

Rule Agaisnt Perpatuties

Answer 32

Under the common law a future interest must vest within 21 years of the death of a life in being. If there is any possibility that the future interest will not vest within this time period the interest will be invalidated.

In many jurisdictions courts will wait and see if the future interest actually does fail to vest within 21 years after the death of a life and being rather than invalidating interest for any possibility that it will fail to vest within the time period.

Under a modern trend some courts will reduce age contingencies exceeding 21 years to validate a conveyance that otherwise violates the common law rule against perpetuities.

For example, A conveys Greenacre to A for life, then A’s children who reach the age of 30. This conveyance would be invalidated under the common law, because there is a possibility that the interest would not vest within 21 years after death.
However the modern trend allows courts to rewrite the conveyance to; “O conveys Greenacre for A for life, then to A’s children who reach the age of 21.”