Trusts

Question 1

A trust of personal property is valid if it has:

Answer 1

A trustee, a beneficiary, and trust property.

Trustee: manages the trust property and holds it for the benefit of the beneficiaries. A trust will not fail for lack of a specifically appointed trustee (court will appoint one).

Beneficiary: in a private express trust, beneficiaries must be definite and ascertain able. Further, the same person cannot be the sole trustee and the sole beneficiary or the trust collapses.

Trust property (trust res): must be identifiable.

Question 2

Under the Uniform Trust Code, the default rule is that a trust is ___.

Answer 2

Revocable.

An irrevocable trust can still be terminated or modified in some circumstances.

Question 3

Presumption of revocability—trusts.

Answer 3

Under the UTC, an inter vivos trust is revocable unless the instrument expressly states otherwise.

Question 4

Termination of trust by settlor:

Answer 4

Settlor may terminate the trust if all beneficiaries are in existence and all agree to the termination

Question 5

Termination of trust by beneficiaries after settlor dies:

Answer 5

Generally, even an irrevocable trust can be terminated if both the income beneficiaries and the remaindermen (1) unanimously consent and if there is (2) no material purpose of the trust yet to be performed.

Question 6

Pourover will provision

Answer 6

A provision in a will making a gift to an intervivos trust. The provision will be valid so long as the trust is identified in the will and the terms are incorporated in a writing executed before or concurrently with the execution of the will.

Under the modern approach, later-made amendments to the trust are valid.

Under common law, amendments made after execution of the will are not valid.

Question 7

Discretionary trust

Answer 7

Trustee has discretion to decide when to make a distribution to a beneficiary. The beneficiary cannot demand any part of the income or principle. Nor can a creditor, unless it shows the trustee acted dishonestly or in a state of mind “not contemplated” by the settlor.

Question 8

Support trust

Answer 8

Trustee must pay the bene what is necessary for the beneficiary’s support.

Question 9

Spendthrift trust

Answer 9

A bene cannot voluntarily or involuntarily transfer their interest in the trust and protects the trust from creditors.

Question 10

Charitable trust

Answer 10

May be created for a charitable purpose (poverty, education, religion, health, governmental/municipal purposes, etc.). It must have a large number of not readily identifiable individuals (rather than a few identifiable individuals). Not subject to RAP.

A charitable trust may terminate if the charitable purpose becomes unlawful, impracticable, or impossible. However, cy pres may save the trust.

Question 11

Cy pres

Answer 11

Common law doctrine that is also part of the UTC.

If a particular charitable purpose has become unlawful, impracticable, or impossible to achieve; no alternative charity is named in the trust; and the court finds that the settlor had general, rather than specific, charitable intent, then the court may apply cy pres to modify or terminate the trust by directing that the trust property be distributed in a manner consistent with the settlro’s general charitable intent.

Question 12

Honorary trust

Answer 12

Trust that does not have a charitable purpose or a definite beneficiary. Often a trust to take care of a thing (e.g., cemetery plot) or for a pet. Under the UTC, this is valid but may not be enforced for more than 21 years. Under common law, such a trust would not be valid if it violates RAP, but a court may characterize the trust as a power and allow the trustee to exercise that power in accordance with the trust terms for 21 years.
Enforceable by someone named in the trust or appointed by the court

Question 13

Duty of loyalty

Answer 13

Trustee has a duty of loyalty to act in the best interest of the beneficiaries.

Question 14

Duty of care

Answer 14

A trustee must exercise reasonable care, skill, and caution when investing and managing trust assets.
Investment decisions evaluated within the context of the entire trust portfolio as a part of an overall investment strategy.

Question 15

Remedies for a breach of trust:

Answer 15

Suspending or removing a trustee
Decreasing compensation
Compelling a trustee to perform trust duties
Compelling payment of damages

Question 16

In a self-dealing case, the trust beneficiaries may:

Answer 16

Rescind the transaction and ask for the self-dealing purchase to be set aside (trust property is returned to the trust and the amount paid is refunded by the trust) or recover any profits the trustee made by reason of the breach.

Question 17

A person writing a will or trust can give her beneficiaries a power of appointment, which ____.

Answer 17

Enables the beneficiary to designate who will receive specific property.

Question 18

General power of appointment

Answer 18

The class of people that the beneficiary can exercise the power of appointment in favor of is unlimited (herself, creditors, etc.).

Majority view: general residuary clause in a will (“I give all of my estate…”) does not exercise a power of appointment. However, if the clause is coupled with a blanket exercise clause (“including all property over which I have a power of appointment”), any power of appointment held by the donee is exercised, unless the donor of the power specifically requires reference to it.

Minority: general testamentary power of appointment can be exercised by general language in the beneficiary’s will (residuary clause) even if it makes no reference to the power in the instrument (“everything to my husband”—the husband will get it), unless the creating instrument of the power made an express gift in default of the instrument stated that the power needed to be specifically mentioned.

Question 19

Special (or limited) power of appointment

Answer 19

The class of people that the beneficiary can exercise the power in favor of is limited. A special testamentary power needs to be specifically exercised. The UPC adopts a substantial compliance rule which says that if it can be shown that the power holder intended to exercise a power, a blanket exercise clause may be sufficient.

Question 20

UPC approach to giving gifts to a class

Answer 20

When a class gift is made, each living beneficiary will take their share and the deceased beneficiary’s share will pass to their surviving descendants. (If there are no surviving descendants then the gift will fail.)

Note: this applies even if the beneficiary is not related to the settlor (and thus differs from most anti-lapse statutes).

Question 21

Will devises the residuary estate to two or more benes and one predeceases the testator (anti-lapse statute does not apply) -> what happens under the common law approach?

Answer 21

the surviving benes cannot divide the dead bene’s residuary portion among them -> that portion passes by intestacy

Question 22

If you see a gift to a class in a Decedents’ Estates question:

Answer 22

If a testator gives a gift to a group of unrelated individuals and one predeceased him, the deceased would not take, and neither would his descendants, unless the antilapse statute saved the gift.

Question 23

What is a trust?

Answer 23

An arrangement under which the trustee holds legal title to property for the benefit of the beneficiaries. Trustee has burdens and beneficiaries have benefits of property ownership. Trustee is subject to fiduciary standards; he is not privileged to use trust property as his own. Harsh “self-dealing” rules preclude trustee from doing so.

Question 24

Delivery requirement

Answer 24

Does not apply to self-declaration of trust (“I hereby declare myself trustee…”) or testamentary trust.

For inter vivos trust with third party as trustee, there must be delivery of subject matter of the trust.

Question 25

A trust may be created for any purpose that is not

Answer 25

Illegal, contrary to public policy, or impossible to achieve

Question 26

Intent to create a trust:

Answer 26

Precatory (permissive language) does not create a trust—“it is my wish and my desire.” Needs to show intent to require a use, not suggest a use. Or intent to impose a duty.

Question 27

The “res” requirement

Answer 27

In order to have a trust, there must be a specific interest in property to which the trustee’s duties relate, such that the beneficiary who is dissatisfied with the trustee’s performance can say “you are not doing your job with respect to these assets.” The subject matter of the trust must be certain and identifiable. If there is no certain and identifiable trust property, there is no trust!

Question 28

Are choses in action and accounts receivable sufficient to support a trust?

Answer 28

Yes, they are interests in property and are thus sufficient even though they are intangible. Ex: B states “I hereby declare myself trustee of the debt which A owes me, said trust to be for the benefit of C.” NOT: A states “I hereby declare myself trustee of the debt which I owe to B.”

Question 29

Gratuitous promise to create a trust in the future:

Answer 29

When a promise to create a trust is gratuitous (not supported by consideration), a trust arises when all elements of a valid trust have been met if, but only if, at that subsequent time the settlor manifests an intention then to create the trust. Indicia of trust might include: distribution of income to beneficiary; or keeping records like a trustee would.

Question 30

A private trust must have ____.

Answer 30

Ascertainable beneficiaries. Ex: “friends” is not an ascertainable class. Traditionally, a trust invalid for want of definite beneficiaries cannot be given effect as a power of appointment. However, today it can. If class is defined, shares may be left to discretion of the trustee.

Question 31

Do beneficiaries have to be alive?

Answer 31

No—unborn beneficiaries can be represented by guardian ad litem. If the class is never filled, money will be returned to the settlor’s estate by resulting trust.

Question 32

Resulting trust

Answer 32

Reversionary interest that arises when all or part of a trust fails. Property goes back to the settlor, the trust creator.

Question 33

Are revocable trusts valid?

Answer 33

Yes, even though the settlor retains the right to revoke, alter, or amend the trust, keeps an income interest or other interests in the trust as beneficiary, retains a power of appointment over the trust corpus or retains everyday control over the trust either by naming herself trustee or by retaining veto power over the trustee’s decisions.

Question 34

Is a gift by will to a revocable, amendable trust valid?

Answer 34

Yes—Uniform Testamentary Additions to Trust Act. The only requirements are that the trust be identified in T’s will and its terms set out in a written instrument. The instrument may be executed before, concurrently with, or after the will. The devised property is added to the trust as it exists at T’s death, including any amendments after the will was executed, even though the trust amendments were not executed with testamentary formalities.

Question 35

What happens if T revokes the trust before she dies and her will included a gift to the trust?

Answer 35

The gift to the trust in the will lapses.

Question 36

Oral inter vivos trusts

Answer 36

An oral inter vivos trust of personality is enforceable provided its terms can be established by clear and convincing evidence. However, trusts containing land (whether created by declaration of trust or by inter vivos transfer) must be evidenced by a writing that satisfies the Statute of Frauds.

Question 37

Constructive trust

Answer 37

Remedy imposed by a court to prevent unjust enrichment as the result of wrongful conduct like fraud, undue influence, or breach of fiduciary duty. May be imposed where (1) fraud in inducement—person promises to serve as trustee when they have no intention to perform on that promise; or (2) confidential relationship: grantee-trustee served in confidential relationship to grantor-settlor.

Question 38

Oral promise (supported by consideration) to make devise in will:

Answer 38

Majority: with respect to personal property, oral contracts to make a will are enforceable provided their terms can be established by clear and convincing evidence. Contracts to devise land must be in a SOF writing. UPC: any contract to make a will, not to revoke a will, or to die intestate, can only be shown if (1) the terms are in the will itself (2) the terms are in a written contract or (3) the will refers to the contract and extrinsic evidence proves the terms.

Question 39

Four distinctive rules that apply to charitable trusts:

Answer 39

1. Not subject to RAP or Rule Against Accumulations (can last and accumulate income perpetually) 2. Must be for charitable purpose 3. Must be in favor of a reasonably large number of unidentifiable beneficiaries. 4. When specific charitable purpose can no longer be accomplished, may be reformed under cy pres doctrine.

Question 40

What trust is created when it provides that: “No interest of any beneficiary herein shall be assignable by such beneficiary nor shall it be subject to the claims of the beneficiary’s creditors.”

Answer 40

Spendthrift trust.

Question 41

What kind of trust is created with the provision: “to distribute or apply the income for the support of my husband during his lifetime to the extent necessary in the sole discretion of my trustee.”

Answer 41

Discretionary support trust. Trustee has a duty to support the beneficiary from the income of the trust if he can’t support himself. May take into account other resources available to the beneficiary for support. Courts are reluctant to question a trustee’s decisions when the trustee has been given extended discretion (“sole,” “absolute,” or “uncontrolled”).

Question 42

What kind of trust is created with provision: “to accumulate or distribute income to my husband in the discretion of my trustee.”

Answer 42

Pure discretionary trust. Beneficiary’s only right is to have an honest trustee who acts in good faith with proper motive.

Question 43

Prudent Investor Rule

Answer 43

Except as otherwise provided by the terms of the trust, a trustee must manage property as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust and by pursuing an overall investment strategy reasonably suited to the trust. A trustee must adhere to a standard of reasonable care, skill, and caution in making investment decisions. 1. Duty not to commingle 2. Duty to balance return with potential risk 3. Duty to diversify investments 4. Duty to keep trust productive

Question 44

Liability for breach of trust

Answer 44

Whenever trustee breaches fiduciary duty, beneficiary has a choice of options: 1. Ratify the transaction and waive the breach 2. Sue for the resulting loss. 3. In self-dealing cases, he can trace and recover the property for the trust.

Question 45

To create a valid trust, there must be...

Answer 45

A (1) settlor who, (2) intending to create a trust for a valid (3) trust purpose, (4) delivers the trust property to the (5) trustee to hold for the benefit of one or more (6) beneficiaries.

Question 46

Do the beneficiaries need to be identified at the time a trust is created?

Answer 46

No, but they must be susceptible of identification by the time their interests are to come into enjoyment.

Question 47

May the trust beneficiaries be a class?

Answer 47

Yes, provided that the class is sufficiently definite and are ascertainable when they are to benefit.

Question 48

Can the settlor allow the trustee in its discretion to select the members of a class?

Answer 48

Yes, as long as the class is reasonably definite.

Question 49

What happens if the beneficiary class is too broad?

Answer 49

The trust, or a portion thereof, may be invalid for lack of definite beneficiaries. Should go to the residuary beneficiary.

Question 50

Does a remainder beneficiary’s judgment creditor have a right to immediate payment from the trust?

Answer 50

Except as otherwise provided by statute or as validly restricted by the terms of the trust instrument (spendthrift provision), the interest of an insolvent trust beneficiary can generally be reached in appropriate proceedings to satisfy the claims of his creditors. However, the creditor reaches only the interest of the beneficiary and not the trust property itself.

Question 51

When does the cy pres doctrine apply?

Answer 51

When a specific charitable purpose indicated by the settlor is no longer possible or practical, and the settlor manifested a general charitable intent. In such a case, the court can direct that the trust property be applied to another charitable purpose as close as possible to the original one, rather than permit the trust to fail and become a resulting trust.

Question 52

A trust of personal property is valid if it has:

Answer 52

A trustee, a beneficiary, and trust property. Trustee: manages the trust property and holds it for the benefit of the beneficiaries Beneficiary: must be definite and ascertainable. Trust property: must be identifiable

Question 53

Can the same person be the sole beneficiary and the sole trustee?

Answer 53

No.

Question 54

An inter vivos trust is ___ unless ___.

Answer 54

Revocable; the instrument expressly states otherwise

Question 55

Termination by settlor

Answer 55

Settlor may terminate if (1) all beneficiaries are in existence and (2) all agree to termination.

Question 56

Termination by beneficiaries after settlor’s death

Answer 56

Beneficiaries and remaindermen (1) unanimously consent and (2) there is no longer a material purpose of the trust.

Question 57

Pourover will

Answer 57

Will that makes a gift to a trust is valid if the trust is (1) identified in the wills and (2) the terms are incorporated in a writing executed (3) before or concurrently with the execution of the will. Common law: amendments made after execution are not valid. Modern view: later-made amendments to the trust are valid.

Question 58

Support trust

Answer 58

Trustee must pay what is necessary for the beneficiary’s support.

Question 59

Discretionary trust

Answer 59

Trustee has discretion to decide when to make a distribution to a beneficiary. Beneficiary cannot demand any part of the income or principle, neither can a creditor.

Question 60

Spendthrift trust

Answer 60

Restrains both the voluntary and involuntary transfer of a beneficiary’s interest.

Question 61

Creditor rights to a spendthrift trust

Answer 61

Creditor may not reach part of a beneficiary’s distribution prior to the beneficiary reaching it. Exception: child/spousal support; judgment creditor that provided services for the protection of the beneficiary’s interest in the trust; claim by the U.S. or a state; claims for necessaries.

Question 62

Charitable trust

Answer 62

Created for a charitable purpose. Must have a large number of not readily identifiable individuals.

Question 63

When may a charitable trust be terminated?

Answer 63

If the purpose becomes unlawful, impracticable, or impossible to achieve. Note: cy pres doctrine

Question 64

Cy pres doctrine

Answer 64

When the purpose of a charitable trusts has ended, no alternative charity is named and the settlor had a general, rather than specific, charitable intent, cy pres can be applied to distribute trust property in a manner consistent with the settlor’s general charitable intent.

Question 65

Trustee has what duties?

Answer 65

Loyalty and care

Question 66

Trustee’s duty of loyalty

Answer 66

Act in the best interest of the beneficiaries.

Question 67

Trustee’s duty of care

Answer 67

Prudent administration of the trust. Uniform Prudent Investor Act: trustee must administer the trust as a prudent person would using reasonable care, skill, and caution—evaluated in the context of the portfolio as a whole. Duty to diversify.

Question 68

Power of appointment

Answer 68

A person writing a will or trust can give her beneficiaries a power of appointment. Enables the beneficiary to designate who will receive specific property. Can be general or specific

Question 69

General power of appointment

Answer 69

Class of people that can receive specific property is unlimited. Majority view: General residuary clause (“I give all my estate...”) does not exercise a power of appointment. Need above language + “including all property over which I have a power of appointment” Minority view: general language will convey power of appointment.

Question 70

Special power of appointment

Answer 70

Class of people that the beneficiary can exercise the power of appointment in favor of is limited.

Question 71

When does the class close for a class gift?

Answer 71

When at least one member is entitled to distribution. UPC: each living beneficiary will take their share and the deceased beneficiary’s share will pass to their surviving descendants, even if the beneficiary is not related to the settlor.

Question 72

If a testator gives a gift to a group of unrelated individuals and one predeceased him, does the deceased take?

Answer 72

No, and neither does his issue (unless anti-laps statute saves it).

Question 73

Will a trust fail for lack of a trustee?

Answer 73

No—the court can appoint one.

Question 74

Can a settlor revoke or amend a trust?

Answer 74

Yes, under the Uniform Trust Code, unless the terms expressly state that it is irrevocable. Common law states require that the settlor reserve the power to revoke and amend. Trust is irrevocable unless the instrument says otherwise.

Question 75

The power to revoke also includes the power to:

Answer 75

Amend.

Question 76

Power of appointment is...

Answer 76

An authority created in a donee enabling the donee to designate, within the limits prescribed by the donor of the power, the persons who shall take certain property and the manner in which they shall take it. A general power of appointment is exercisable in favor of the donee, her estate, her creditors, or the creditors of her estate. A special power of appointment, on the other hand, is exercisable in favor of a specified class of persons that does not include the donee, her estate, her creditors, or the creditors of her estate.

Question 77

Presently exercisable power of appointment

Answer 77

Exercisable by the donee during her lifetime.

Question 78

Testamentary power of appointment

Answer 78

Exercisable only by the donee’s will.

Question 79

A trust of personal property is valid if it has (basic elements)

Answer 79

A trustee, a beneficiary, and trust property. e.

Question 80

When can a spendthrift clause not be used?

Answer 80

Cannot be used to shield the bene from: - child or spousal support - claims by the government

Question 81

Uniform Prudent Investor Act (UPIA)

Answer 81

A trustee must “administer the trust as a prudent person would using reasonable care, skill, and caution.” Compliance is measured in light of the circumstances at the time of the trustee's decision

Question 82

Duty to diversify

Answer 82

Duty of a trustee to diversify the assets of a trust to protect the trust's value. Trustee will not be liable for declines in value due to a downturn resulting from general economic conditions, but is liable for failure to diversify absent directions to the contrary.

Question 83

The will devises the residuary estate to two or more benes and one predeceases the testator (anti-lapse statute does not apply) -> what happens under the modern/majority approach?

Answer 83

The surviving benes divide the dead bene's share proportionally to their interests in the residue