Trusts

Question 1

General definition of a trust

Answer 1

A trust is a fiduciary relationship wherein a trustee is given legal title by the settlor to hold and protect the property for the benefit of the beneficiary who takes the equitable title and therefore possesses the power to enforce the trust.

Question 2

What are the 2 types of express trusts?

Answer 2

• private trusts
• charitable trusts

Question 3

What are the requirements to create an express private trust?

Answer 3

• ** intent** - manifestation (oral, written, conduct) - written required for real property or if created in a will - ambiguous language (hope, wish) will NOT create a trust unless it would result in unnatural dispossession and there is a history of support between donor and beneficiary
• ** trust res (property)** - presently identifiable, unless a pour-over devise from a will
• trust purpose - can’t be illegal or against public policy, must be possible to achieve
• ascertainable beneficiaries - must be presently identifiable or capable of being identified by the time the beneficiares receive their interest (exceptions: class gifts, unborn children, and charitable trusts)

Question 4

What are the 2 types of remedial trusts?

Answer 4

• resulting trusts
• constructive trusts

Question 5

are trusts revocable?

Answer 5

• UTC (majority): trusts are presumed to be revocable
• Traditional rule (minority) - trusts are presumed to be irrevocable

Question 6

What are the requirements to make an (express) charitable trust?

Answer 6

• Charitable trust: a trust created for charitable purpose benefiting the community
• chartiable purpose: advancement of health, education, religion, government, relief of poverty, or other purpose benefiting the community at large or a particular segment
• large class of unidentifiable beneficiaries: the beneficiaries must not be ascertainable, such as the community at large or a segment of unidentifiable members
• not subject to RAP
• Cy Pres Doctrine applies
• enforceable by: the AG or the settlor

Question 7

Cy Pres Doctrine

Answer 7

• Cy Pres Doctrine: a court may modify the terms of a charitable trust to seek an alternative charitable purpose if original charity becomes** illegal, impracticable, or impossible to perform**
• specific intent –> court may NOT modify the trust + trust terminated and become a resulting trust
• general intent –> court will substitute a similar charity

Question 8

Protection of Beneficiary’s Interest (e.g. when can a creditor of the beneficiary access the trust/distributions from the trust)

Answer 8

• Rule: the beneficiary’s interest (right to receive income or principal) is freely transferable unless limited by the law or trust. Once the property is distributed to the beneficiary, there can be no restraint on alienability.

Question 9

support trust

Answer 9

• directs trustee to pay income or principal as necessary to support beneficiary
• creditors cannot reach these assets unless providing necessity to beneficiary

Question 10

Spendthrift Trust

Answer 10

• expressly restricts beneficiary’s power to voluntarily or involuntarily transfer equitable interest
• creditors usually can’t reach the trust interest UNLESS is owed for child or spousal support, basic necessities, or tax lien holders

Question 11

income beneficiary

Answer 11

receives income from the trust (e.g. profits from business or rent)

Question 12

remainder beneficiary

Answer 12

entitled to the trust principal upon termination of the trust

Question 13

Lapse and Anti-Lapse

Answer 13

• CL: if beneficiary dies before settlor, the gift to the beneficiary lapses (fails)
• modern statutes: if the beneficiary was blood-related to the settlor, the beneficiary’s surviving issue will take the gift

Question 14

omitted children

Answer 14

A child who is omitted from the trust can force an intestate share if certain equirements are met:
* child born/adopted after trust create, settlor mistakenly believed the child was dead, settlor did not know the child existed AND
* child not intentionally omitted from the trust
* EXCEPT: if the child has been provided for outside of the trust OR left substantially all of estate to omitted child’s parent

Question 15

What are the 2 ways to challenge the validity of a trust?

Answer 15

• undue influence
• fraud

Question 16

undue influence

Answer 16

• traditional approach: susceptibility, motive, opportunity, causation
• confidential relationship: presumption of undue influence when 1) principal beneficiary of will has confidential relationship with testator, 2) principal beneficiary** participated** in executing the will, and 3) the gift to the beneficiary is unnatural
• –> beneficiary must show by clear and convincing evidence that he did not exercise undue influence –> if fail, then only inherit intestate share

Question 17

Fraud

Answer 17

• Fraud: misrepresentation made by a beneficiary with both the intent to deceive the settlor and the purpose of influencing the testamentary disposition. If fraud –> trust invalidated.
• fraud in the inducement: settlor would not have made the gift if he had known the truth
• fruad in the execution: misrepresentation as to teh trust itself of trust contents

Question 18

revocable trust

Answer 18

settlor has the right to modify or terminate a trust (presumption)

Question 19

irrevocable

Answer 19

modification or termination while settlor is still alive can occur only with the consent of all beneficiaries AND if the proposed change will not interfere with a primary purpose of the trust

Question 20

ways a trust terminates

Answer 20

• automatically when the purpose has been fulfilled
• settleor deceased or has no remianing interest + all beneficiaries consent + no unfulfilled material purpose
• express provisions of the trust
• revocation (see revocable or irrevocable)

Question 21

removal of trustee

Answer 21

court can remove a trustee if purpose of the trust would be frusted by the trustee’s continuance in office or if the trustee violated a fiduciary duty

Question 22

trustee’s powers

Answer 22

• powers granted expressly in the trust
• powers necessary to act as a reasonably prudent person managing the trust - implied power to contract, sell, lease, or transfer the property

Question 23

trustee’s duties

Answer 23

• duty of care
• duty of loyalty
• duty to disclose
• duty to account

Question 24

trustee’s duty of care

Answer 24

• general: duty to act as a resonably prudent person and treat the trust property as if it was his own
• duty to follow the trust directions
• prudent investor rule: act as if it was their own money when investing - exercise reasonable care, caution, skill
• duty to diversify: spread the risk of loss, look at total portfolio
• duty to make property productive: derive max income from investments, secure insurnace, pay expenses, act w/in reasonable time
• duty to be impartial: between present beneficiaries, between present and future beneficiaries

Question 25

duty of loyalty

Answer 25

• duty to administer trust in good faith (subjective) and to act reasonably (objective) when investing property and otherwise managing the trust solely in the best interest of the beneficiaries
• self dealing - rebuttable presumption that trustee violated the duty of loyalty
• if self dealing authorized by settlor, court order, or all beneficiaries + transaction reasonable and fair –> ok

Question 26

remedies for violation of the trustee’s duties

Answer 26

lost profits, interest, other losses resulting from breach are trustee’s responsibiliy
beneficiaries may sue trustee and seek damages or removal of the trustee for breach of duties

Question 27

When can the creditor of a beneficiary reach the principal or income of a trust?

Answer 27

only when such amounts become either payable to the beneficiary or subject to the beneficiary’s demand (unless support trust or spendthrift trust in which case not ever accessible unless certain exceptions apply)

Question 28

resulting trust

Answer 28

• used when a trust fails
• trustee must return the property to the settlor or settlor’s estate
• goal = avoid unjust enrichment

Question 29

constructive trusts

Answer 29

• remedy used to prevent unjust enrichment if a third party takes advantage of the settlor
• key characteristic = wrongful conduct (fraud, undue influence, duress) directed towards settlor