Trusts

Question 1

Definition of Trust

Answer 1

Fiduciary relationship whereby a trustee is given legal title by the settlor to hold and protect property for the benefit of the beneficiary, who takes equitable title/interest

Question 2

4 Main Types of Trust

Answer 2

1. Express - Private
2. Express - Charitable
3. Implied - Resulting
4. Implied - Constructive

Question 2

Elements of Private Express Trust (6)

Answer 2

1. Settlor
2. Trustee
3. Ascertainable Beneficiaries
4. Intent
5. Trust Property
6. Valid Trust Purpose

Question 2

Secret Trust (definition and standard of proof)

Answer 2

• What appears to be an outright gift in a will actually based on promise to devisee (trustee) to hold property for another’s benefit
• Clear and convincing evidence

Question 3

Remedy of secret trust

Answer 3

Constructive (implied) trust to avoid unjust enrichment to the devisee (secret trustee)

Question 4

Result of semi-secret trust (CL remedy)

Answer 4

CL: No extrinsic evidence, so trust fails
- Remedy: Resulting (implied) trust in favor of T’s heirs

Modern trend: Constructive trust in favor of intended beneficiary if determinable

Question 5

Semi-Secret Trust

Answer 5

Will directs gift to be held in trust without naming a beneficiary

Question 6

Charitable trust (definition & elements)

Answer 6

Trust created for a charitable purpose benefiting the community

1. Charitable purpose
2. Large class of unidentifiable beneficiaries

Question 6

Support trust

Answer 6

Directs T to use discretion to pay income/principal as necessary to support B

Creditors could feasibly attach to trust property

Question 6

Transferability of B’s interest (generally)

Answer 6

Right to receive P/I freely transferable unless limited by trust or law.

Question 7

Cy Pres doctrine

Answer 7

Allows court to modify the terms of a charitable trust when it can’t be performed as written, so long as consistent with S’s intent

Court seeks similar charitable purpose if original becomes illegal, impossible or impracticable

Question 8

Types of distributions (2)

Answer 8

Mandatory

Discretionary

Question 9

Spendthrift trust/clause

Answer 9

Restricts B’s power to transfer equitable interest. Cs can’t reach assets until property paid out

Question 10

Exceptions to spendthrift/support trusts

Answer 10

Child/spousal support, tax liens, some necessities

Question 11

Ways a trust may automatically terminate (3)

Answer 11

1. Revoked or expires per terms
2. No remaining purpose
3. Purpose becomes unlawful, impossible, contrary to public policy

Question 12

Modifying/terminating revokable trust (2 ways)

Answer 12

1. Substantial compliance with terms; or
2. If no method, by later will/codicil/any method evidencing C&CE of intent

Question 13

Modifying/terminating irrevocable trust (noncharitable)(2 ways)

Answer 13

1. Consent of all Bs and S
2. Consent of all Bs if termination/modification consistent with trust terms/purpose (e.g., purpose fulfilled)

Question 14

Clafin doctrine/Unfulfilled material purpose

Answer 14

If S dies and all Bs agree to terminate, T can block if contrary to material trust purpose

Question 15

Reasons for Modification/termination by court (4)

Answer 15

1. Unanticipated changes prevent purpose or effective administration
2. Uneconomic
3. Correct mistakes of law/fact
4. Achieve S’s tax objectives

Question 16

Modification/termination by Trustee

Answer 16

Cannot modify/terminate by himself unless terms provide

Question 17

Resignation/Removal of Trustee (each)

Answer 17

Resignation: T may resign on 30 days notice to Bs, S (if alive) and any co-Ts, OR with court approval

Removal: Unless terms provide only court can remove for breach of duty, bad acts, etc

Question 18

Principal and income allocations (Common Law and UPAIA)

Answer 18

Common Law: Income to lifetime beneficiary, principal to remainderholder

UPAIA: Focus on total return, T can re-characterize and reallocate between P/I to fulfill purposes, so long as fair and reasonable

Question 19

Factors of P/I allocation

Answer 19

1. Intent of Settlor
2. Terms of trust
3. Nature, duration and purpose of trust
4. identities and circumstances of Bs
5. Anticipated effect of economic conditions and taxes

Question 20

Test approach for administration & duties (3 steps)

Answer 20

1. Was conduct authorized by trust/law
2. If yes, did T perform up to requisite duties?
3. What are the remedies

Question 21

General fiduciary standard for trustee

Answer 21

Fiduciary duty to administer trust in the best interests of the beneficiaries

Question 22

Two types of powers of trustee

Answer 22

1. Express: Powers set forth in trust 2. Implied: Implied power to do what's best for Bs and powers necessary to do so

Question 23

Duty of care standard (subjective)

Answer 23

Administer trust in good faith, in accordance with terms, for best interests of Bs

Question 24

Duty of loyalty breaches (objective)

Answer 24

1. Conflict of interest 2. Self-dealing

Question 25

Prudent investor rule (UPIA)

Answer 25

Duty to invest and manage as prudent investor would when investing in own property, including using special skills

Question 26

General duties of trustee

Answer 26

1. Care 2. Loyalty 3. Impartiality 4. Inform 5. Account

Question 27

Can self-dealing be permissible

Answer 27

Yes but only if trust permits or Bs authorize, and fair/reasonable

Question 28

Can conflict of interest be permissible

Answer 28

Yes, if T acted reasonably and in good faith

Question 29

B's remedies for T's breach

Answer 29

1. Remove T 2. Damages (gains can't offset loss) 3. Ratification 4. Tracing - force T to sue 3P to recover if not BFP

Question 30

3P rights against T

Answer 30

T may be personally liable in contract/tort to 3P but can seek indemnity if acting within scope of duties

Question 31

Co-trustee liability

Answer 31

Liable unless no knowledge and couldn't prevent

Question 32

Successor trustee liability

Answer 32

Not liable for prior bad acts unless knew/should have known, and did nothing to correct

Question 33

Resulting Trust (purpose and circumstances

Answer 33

Purpose: Avoids unjust enrichment Circumstances: T required to convey property to S if - failure of express trust - incomplete disposition of assets

Question 34

Constructive Trust (purpose and elements - 5)

Answer 34

Purpose: Avoid unjust enrichment caused by bad conduct Elements 1. Defendant holds title to property subject to CT 2. Wrongful conduct caused S to convey property 3. Proved by C&CE 4. If subject matter transferred to non-BFP 3P, B may trace property and recover 5. Defenses: Unclean hands; laches (unreasonable delay in asserting claim)