Trusts

Question 1

What are 5 common charitable purposes?

Answer 1

1. The relief of poverty
2. The advancement of education or religion
3. The promotion of good health
4. Governmental or municipal purposes
5. Other purposes benefiting the community at large or a particular segment of the community

Question 2

How should principal and income be allocated under the modern / UPAIA approach?

Answer 2

A trustee is empowered to re-characterize items and reallocate investment returns as necessary to fulfill the trust purposes, as long as the reallocations are reasonable and are in keeping with the trust instrument.

Question 3

What is the prudent investor rule under the UPIA?

Answer 3

The trustee must act as a prudent investor would when investing his own property, and must exercise reasonable care, caution, and skill when investing and managing trust assets unless the trustee has special skills or expertise, in which case he has a duty to utilize such assets.

Question 4

How can a person accept a trusteeship?

Answer 4

A person designated as a trustee can accept the position by substantially complying with a method of acceptance provided for in the terms of the trust.

If the terms of the trust do not provide a method of acceptance, or the method is not made exclusive, then (i) by accepting delivery of the trust property, (ii) exercising powers as a trustee, (iii) performing duties as a trustee, or (iv) otherwise indicating acceptance of the trusteeship.

Question 5

What are the elements of a valid private express trust?

Answer 5

1. Settlor who has a capacity to create a trust
2. Clearly expresses a present intent to transfer ownership of
3. Property to
4. A trustee who has duties to perform
5. For the benefit of one or definite or ascertainable beneficiaries
6. For a valid purpose

Question 6

What is a valid trust purpose?

Answer 6

A trust can be created for any purpose, as long as it is not illegal, restricted by rule of law or statute, or contrary to public policy, and is possible to achieve.

Question 7

How does a testamentary trust occur?

Answer 7

Testamentary trusts occur when the terms of the trust are contained in writing in a will or in a document incorporated by reference into a will.

Question 8

What is the rule regarding delivery for an inter vivos trust?

Answer 8

Although a simple declaration of trust will usually suffice if the settlor is also the trustee, delivery must accompany the declaration if a third-party trustee is named, whereby the settlor parts with dominion and control over the trust property.

Question 9

What is the trustee’s duty to be impartial?

Answer 9

A trustee must balance the interests of the present and future beneficiaries by investing the property so that it produces a reasonable income while preserving the principal for the remaindermen, and sell trust property within a reasonable time if a failure to diversify would be inconsistent with the total performance portfolio approach.

The duty does not require that the trustee treat each beneficiary equally, but it does require a trustee not to be influenced by the trustee’s personal favoritism or animosity toward individual beneficiaries in administering the trust.

Question 10

When must the manifestation of intent occur?

Answer 10

The manifestation of intent must occur either prior to or simultaneously with the transfer of property.

Question 11

What happens to a predeceased beneficiary’s interest in a trust under the modern trend?

Answer 11

A predeceased beneficiary’s interest in a trust will not lapse; rather a substitute gift is created in the descendants of the deceased issue.

Question 12

What future interest does a grantor retain?

Answer 12

If a grantor retains a future interest, then it is a reversion, a possibility of reverter, or a right of entry.

Question 14

What are a beneficiary’s powers of appointment?

Answer 14

Usually given to a beneficiary, a power of appointment enables the holder to direct a trustee to distribute some or all of the trust property without regard to the provisions of the trust.

Question 15

What is the beneficiaries’ right of enforcement?

Answer 15

Lost profits, lost interests, and other losses resulting from a breach of trust are the responsibility of the trustee, and beneficiaries may sue the trustee and seek damages or removal of the trustee for breach.

Question 16

What is the duty of prudence?

Answer 16

The trustee may delegate responsibilities if it would be unreasonable for the settlor to require the trustee to perform such tasks. If a function goes to the heart of the trust or constitutes a critical function concerning the property, then the function is discretionary and is not delegable. Otherwise, the function is merely ministerial and can be delegated.

Question 17

What is a “semi-secret” trust?

Answer 17

A semi-secret trust occurs when a gift is directed in a will to be held in trust, but the testator fails to name a beneficiary or specify the terms or purpose of the trust; extrinsic evidence may not be presented, the gift fails, and a resulting trust is imposed on the property to be held in trust for the testator’s heirs.

Question 18

What kind of trust directs the trustee to use her discretion to pay income or principal as necessary to support the trust beneficiary while preventing creditors from reaching the assets unless providing a necessity to the beneficiary?

Answer 18

Support trust

Question 19

How should receipts for the exchange or use of trust property be allocated?

Answer 19

An amount received in exchange for trust property is allocated to principal, and an amount received for the use of trust property is allocated to income.

Question 20

What future interest does a beneficiary retain?

Answer 20

If a beneficiary is given a future interest, then it is either a remainder or an executory interest.

Question 21

What standard is applicable when an alleged conflict of interest arises that cannot be characterized as self-dealing?

Answer 21

The “no further inquiry” standard is inapplicable, and the transaction is assessed under the “reasonable and in good faith” standard.

Question 22

What must be true for a trust to be considered charitable?

Answer 22

It must have a stated charitable purpose and it must exist for the benefit of the community at large or for a class of persons the membership in which varies.

Question 23

What is a trustee’s duty to disclose?

Answer 23

A trustee must disclose to the beneficiaries complete and accurate information about the nature and extent of the trust property, including allowing access to trust records and accounts. The trustee must also identify possible breaches of trust and promptly disclose such information to the beneficiaries.

Question 24

What is a trustee’s liability for agents?

Answer 24

A trustee is not liable for breaches committed by an agent unless the trustee:

• Directs, permits, or acquiesces in the agent’s act
• Conceals the agent’s act
• Negligently fails to compel the agent to redress the wrong
• Fails to exercise reasonable supervision over the agent
• Permits the agent to perform duties that the trustee was not entitled to delegate
• Fails to use reasonable care in the selection or retention of agents

Question 25

Name and define the most restrictive type of trust.

Answer 25

Mandatory trust: essentially the opposite of a discretionary trust. The trustee of a mandatory trust has no discretion regarding payments; instead, the trust document explains specifically and in detail how and when the trust property is to be distributed.

Question 26

In general, how should principal and income be allocated?

Answer 26

Life beneficiaries = trust income Remaindermen = trust principal In addition, the allocation must be balanced so as to treat present and future trust beneficiaries fairly, unless a different treatment is authorized by the trust instrument.

Question 27

What is a "secret" trust?

Answer 27

It looks like a testamentary gift, but it is created in reliance on the named beneficiary’s promise to hold and administer the property for another; if the promise is proven by clear and convincing evidence, then a constructive trust is imposed on the property for the intended beneficiary, so as to prevent the unjust enrichment of the “secret” trustee.

Question 28

What is a possibility of reverter?

Answer 28

When the grantor conveys a fee simple determinable estate, he is deemed to have retained a possibility of reverter, wherein the right to possession reverts to the grantor, and the fee simple estate automatically ends, upon the happening of a specified condition or event.

Question 29

What is the rule against self-dealing regarding a trustee?

Answer 29

When a trustee personally engages in a transaction involving the trust property, a conflict of interest arises between the trustee’s duties to the beneficiaries and her own personal interest.

Question 30

Under the rule of self-dealing, what are generally prohibited transactions with trust property?

Answer 30

* Buying or selling trust assets (even at fair market value) * Selling property of one trust to another trust that the trustee manages * Borrowing from or making loans to the trust * Using trust assets to secure a personal loan * Engaging in prohibited transactions with friends or relatives * Otherwise acting for personal gain through the trustee position

Question 31

Can a third party be held liable for her role in a breach of trust?

Answer 31

Yes. Common law presumed that the purpose of the trust was to preserve trust property, requiring those dealing with trustees to carefully inspect the trust property before dealing with the trustee. The modern trend presumes that the purpose of the trust is to hold and manage trust property, and it provides greater protection to third parties.

Question 32

What is a co-trustee's liability?

Answer 32

Co-trustees are jointly liable, although the liability may be limited if only one trustee acts in bad faith or benefited personally from the breach. A co-trustee may be liable for breach for: * Consenting to the action constituting the breach * Negligently failing to act to prevent the breach * Concealing the breach or failing to compel redress * Improperly delegating authority to a co-trustee

Question 33

How long does a class remain open?

Answer 33

The class remains open and may admit new members until (i) at least one class member is entitled to obtain possession of the gift, or (ii) the preceding interest terminates (e.g., the holder of the present life interest dies).

Question 35

When is a disclaimer to trust property effective?

Answer 35

A disclaimer is not effective unless it is reduced to writing within nine months after the future interest would become “indefeasibly vested.”

Question 36

What is a precatory trust?

Answer 36

When a donor transfers property to a donee using language that expresses a hope or wish (rather than creating a legal obligation) that such property be used for the benefit of another.

Question 37

What is a trustee's duty to account?

Answer 37

A trustee must periodically account for actions taken on behalf of the trust so that his performance can be assessed against the terms of the trust; waiver of the duty to report does not relieve a trustee from liability for misconduct that would have been disclosed by a report.

Question 38

What is a reversion?

Answer 38

A reversion is a future interest in which the grantor has the right to possess the property after a finite estate ends. If the grantor does not convey his entire interest but does not explicitly retain an interest, then a reversionary interest is implied.

Question 39

What is a discretionary trust?

Answer 39

When the trustee is given complete discretion regarding whether to apply payments of income or principal to the beneficiary; creditors have the same rights as a beneficiary if the trustee exercises discretion to pay.

Question 40

What is a trustee's duty of loyalty and good faith?

Answer 40

A trustee has a duty to administer the trust in good faith (subjective standard) and to act reasonably (objective standard) when investing property and otherwise managing the trust solely in the best interests of the beneficiaries.

Question 41

In what five instances can a court modify or terminate a trust?

Answer 41

1. Unanticipated changes 2. Inability to administer the trust effectively 3. Trust becomes uneconomic 4. To correct mistakes 5. To achieve the settlor's tax objectives

Question 42

What is the cy pres doctrine?

Answer 42

Under the cy pres doctrine, a court may modify a charitable trust to seek an alternative charitable purpose if the original charitable purpose becomes illegal, impracticable, or impossible to perform.

Question 43

When does a vested remainder accelerate into possession?

Answer 43

A vested remainder accelerates into possession as soon as the preceding estate ends for any reason.

Question 44

What is the trustee's duty to diversify?

Answer 44

The trustee must adequately diversify the trust investments to spread the risk of loss.

Question 45

What are the methods for revoking a trust?

Answer 45

1. By substantial compliance with a method provided in terms of the trust. If no method is provided in the trust, then: 2. By a later will / codicil that expressly refers to the trust or specifically devises property that otherwise would have passed according to the terms of the trust; or 3. By any other method manifesting clear and convincing evidence of the settlor’s intent.

Question 46

When does a trust terminate automatically?

Answer 46

1. When it is revoked or expires pursuant to its terms 2. When no purpose of the trust remains to be achieved 3. When the purposes of the trust have become unlawful, contrary to public policy, or impossible to achieve.

Question 47

Do the majority of jurisdictions presume that a trust is revocable or irrevocable?

Answer 47

In most jurisdictions, a trust is presumed to be revocable unless it expressly states that it is irrevocable.

Question 48

What is the trustee's duty to make property productive?

Answer 48

The trustee must preserve trust property and work to make it productive by: * Pursuing all possible claims * Deriving the maximum amount of income from investments * Selling assets when appropriate * Securing insurance * Paying ordinary and necessary expenses * Acting within a reasonable period of time in all matters

Question 49

How should expenses be allocated?

Answer 49

Expenses charged to income: - 1/2 trustee's compensation - 1/2 accounting / court costs - Ordinary expenses - Insurance Premiums Expenses charged to principal: - 1/2 trustee's compensation - 1/2 accounting / court costs - Payments on the principal of trust debt - Expenses for any proceeding concerning an interest in principal - Estate taxes - Payments related to environmental matters

Question 50

What is a spendthrift trust?

Answer 50

A spendthrift trust expressly restricts the beneficiary’s power to voluntarily or involuntarily transfer his equitable interest; creditors usually cannot reach the trust interest if the governing instrument contains one (unless for child or spousal support, tax lien holders, and sometimes basic necessities providers).

Question 51

What is the irrebuttable presumption when self-dealing is an issue?

Answer 51

That the trustee breached the duty of loyalty; no further inquiry into the trustee’s reasonableness or good faith is required because self-dealing is a per se breach of the duty of loyalty.

Question 52

What is a legally enforceable trust that is not created for charitable purposes but has no definite human beneficiaries (such as animal trusts and noncharitable purpose trusts)?

Answer 52

Honorary trust

Question 53

What is a trustee's liability to third parties?

Answer 53

A trustee is personally liable on contracts entered into and for tortious acts committed while acting as trustee. If the trustee acted within the scope of trustee duties, then the trustee is entitled to indemnification from the trust.

Question 54

What is the trustee's duty of prudent administration?

Answer 54

The trustee has a duty to administer the trust as a prudent person and must exercise reasonable care, skill, and caution with regard to trust property. This includes duties to secure possession of property within a reasonable time; to maintain real property; and to segregate personal property from trust assets.

Question 55

What is the trustee's liability for distributions made pursuant to a trust when the trustee did not know that the trust had been revoked or amended?

Answer 55

A trustee who does not know that a trust has been revoked or amended is not liable to the settlor or settlor’s successors in interest for distributions made and other actions taken on the assumption that the trust had not been amended or revoked.

Question 56

What is the name of the future interest in a holder who is ascertainable, when there is no express condition precedent required before the interest becomes possessory?

Answer 56

Vested remainder

Question 57

What is a totten trust?

Answer 57

It is a designation given to a bank account in a depositor's name as trustee for a named beneficiary (no separation of legal and equitable title), and it can be revoked by any lifetime act manifesting the depositor's intent to revoke, or by will.

Question 58

What is an executory interest?

Answer 58

If someone other than the grantor holds an interest that is preceded by either a vested remainder subject to divestment or a fee simple subject to an executory limitation, then that person holds an executory interest.

Question 59

How are adopted children treated under the modern trend and the UPC with regards to a class gift?

Answer 59

The modern trend is to presume that “children” includes adopted children absent a contrary intent. Under the UPC, an adopted person is included in the class gift in accordance with the UPC rules for intestate succession, which provide that an adopted person is the child of his or her adoptive parent.

Question 60

What is a pour-over devise?

Answer 60

A pour-over devise is a provision in a will that directs the distribution of property to a trust upon the happening of an event, so that the property passes according to the terms of the trust without the necessity of the will reciting the entire trust.

Question 61

Why must beneficiaries of a private trust be ascertainable?

Answer 61

So that the equitable interest can be transferred automatically by operation of law and directly benefit the person. *Note that the settlor may refer to acts of independent significance when identifying trust beneficiaries.*

Question 62

What are the exceptions to the rule regarding ascertainable beneficiaries?

Answer 62

- Unborn children - Charitable trusts

Question 63

When can a noncharitable irrevocable trust be modified or terminated?

Answer 63

1. By the consent of all beneficiaries if a court concludes that the trust continuance of the trust is not necessary to achieve any material purpose of the trust or that modification is not inconsistent with a material purpose of the trust 2. By the consent of all beneficiaries and the settlor even though the modification or termination is inconsistent with a material purpose of the trust

Question 64

How is a distribution of stock treated under the UPAIA / RUPIA?

Answer 64

A distribution of stock, whether classified as a dividend or as a split, is treated as a distribution of principal.

Question 65

What is a right of entry?

Answer 65

When the grantor conveys a fee simple estate subject to a condition subsequent, then upon the happening of the condition subsequent, the grantor is deemed to have retained the right to enter or retake possession, but the fee simple does not end automatically.