Trusts Flashcards
(4 cards)
Asset Gain
In general, the identity of the property producing gain will determine whether that gain is allocated to the principal of the trust or to income. If the gain is considered principal, that principal is added to the existing principal of the trust. If the gain is considered income, the income will be paid out to the beneficiaries in accordance
with the trust. As a general rule, the proceeds from the sale of real estate owned by the trust will be considered principal.
In this case, the Trustee bought and sold an office building owned by the trust. Therefore, the $700,000 sale proceeds would be added to the principal of the trust. However, unlike the sale proceeds from the office building, rents received from any real property owned by the trust will be considered income, which will be distributed to the beneficiaries. In this case, the trustee received $30,000 in rents which would be considered income.
Investments
In terms of the securities (investments) owned by the trust, cash dividends will be considered income and distributed to the beneficiaries. However, the stock dividend of 400 shares of Acme stock would be considered principal and would be added
back to the principal of the trust. In general, the trustee may have the ability to reallocate whether some property of the trust is considered income or principal depending on the trust purpose as
outlined by the settlor. For example, if the purpose was to provide income to the beneficiary and most of the property is considered principal, the trustee may be able to re-designate some of the property as income producing and thereby accomplish the primary purpose of the trust.
Future distribution of trust income and principal
The issue in this case is whether a beneficiary can validly disclaim an interest in the trust against the primary purpose of the trust as outlined by the settlor.
In general, an individual may disclaim a testamentary interest provided to him. This may create a situation in which the devised gift creates lapse and would be distributed in accordance with the jurisdictions anti-lapse statute. In this case, the jurisdictions anti-lapse statute indicates that a beneficiary will not be able to disclaim
unless the interest is validly disclaimed within 9 months of the Testator’s death. The son did not satisfy that condition, and therefore, he will not be able to validly disclaim his interest.
Modifying a trust purpose statement
As a general rule, in order to modify a trust purpose, all the beneficiaries of the trust must be in agreement. This is true even when the interests in the trusts are not yet ascertained or have not been born. In this case, a trust was created with a primary
purpose to provide income to the Son and a remainder interest in the Testator’s grandchildren.
In this case, the Testator created a vested remainder subject to complete defeasance in the Testator’s grandchildren who survive the Son. The Son has no children; however, there is one remaining grandchild of the Testator. Therefore, the income and principal must continue to be distributed according to the Testator’s wishes.
