Trusts

Question 1

What is a trust?

Definitions

Answer 1

A trust is a fiduciary relationship in which a trustee holds legal title to specific property under a fiduciary duty to manage, invest, safeguard, and administer the trust assets and income for the benefit of designated beneficiaries, who hold equitable title.

Question 2

Purposes and Uses of Trusts

Answer 2

• Providing for & protecting trust beneficiaries
• Flexibility of asset distribution
• Protection against settlor’s incompetence
• Professional management of property
• Probate avoidance
• Tax benefits

Question 3

Express Trusts

Definitions

Answer 3

Express trusts are created by the express intention of the settlor. They fall into two categories distinguished primarily by the identity of their beneficiaries:
* Private trusts - private beneficiaries (certain ascertainable persons)
* Charitable trusts - charitable beneficiaries (indefinite class of persons or the public in general)

Question 4

Trusts Created by Operation of Law

2 Types

Answer 4

Resulting trusts arise from the presumed intention of the owner of the property.

Constructive trusts are an equitable remedy used to prevent unjust enrichment.

Question 5

Elements of a Valid Trust

Answer 5

1. Intent
2. Identifiable corpus
3. Ascertainable beneficiaries
4. Proper purpose
5. Mechanics & formalities

Question 6

Intent to Create an Express Trust

Answer 6

The five elements required to make an express trust are:
(1) A settlor with capacity to convey,
(2) a present intent to create a trust relationship,
(3) a competent trustee with duties,
(4) a definite beneficiary, and
(5) the same person is not the sole trustee and the sole beneficiary.

There must also be a present disposition in trust of specific property then owned by the settlor, and the trust must have a valid trust purpose.

Question 7

Present Intention to Create a Trust

Answer 7

The settlor’s must intend to split the legal and equitable title and to impose enforceable duties on the holder of the legal title (trustee).

• Intent may be manifested by written or spoken words or by the conduct of the settlor - unless the Statute of Wills or Statute of Frauds applies. No formal words are required. An oral trust of personal property is valid in some states if certain conditions are met
• Communication to beneficiary is not required
• Must be manifested while settlor owns property & prior to conveyance
• Must intend trust to take effect immediately
• Cannot change character of completed gift
• Precatory expressions (hopes, wishes, suggestions) generally do not create a trust

Question 8

Requirement of Identifiable Corpus

Trusts

Answer 8

SUFFICIENT TRUST PROPERTY:
* Where there is no trust property, the trust fails.
* The trust property must be an existing interest in an existing property.
* A future interst may be held in trust, but an interest not yet in legal existence cannot be held in trust.
* Future profits from an existing contract can be a trust res.
* The trust res must be existing property that the settlor has the power to convey, including intangibles (for example, promissory notes) in which the settlor has an assignable interest.

INSUFFICIENT TRUST PROPERTY:
* Property the settlor cannot transfer or does not yet own cannot be trust property.
* An unenforcable gratuitous promise cannot be the subject of a trust

NOTE: The res must be identifiable and segregated, but the res may be a fractional or undivided interest in specific property.

Question 9

Qualified Beneficiaries

Trusts

Answer 9

A qualified beneficiary is a beneficiary who, on the date the beneficiary’s qualification is determined, is: (1) a current beneficiary, or (2) a first-line remainderman (that is, one who would become eligible to receive distributions were the event triggering the termination of the beneficiary’s interest or of the trust itself to occur on the qualification date).

Qualified beneficiaries may have additional rights compared to remote beneficiaries.

Question 10

Beneficiary Disclaimer

Trusts

Answer 10

Under the law of most states, a beneficiary may disclaim an interest by filing a written instrument with the trustee (or, if a trust created by will is involved, with the probate court). If a valid disclaimer is made, the trust is read as though the disclaimant was deceased as of the relevant date.

TIMING:
Many state statutes require that disclaime rbe made within 9 months of the interest’s creation (that is the relevant period for federal gift tax purposes). The time limit does not apply to a beneficiary who is under age 21 (that is, until he turns 21). Some states do not impose a time limit.

ESTOPPEL:
A beneficiary may be estopped from making a disclaimer if they have exercised any dominion or control over the interest or accepted any benefits under the trust.

DISCLAIMANT’S CREDITORS:
Under most state disclaimer statutes, a disclaimer relates back to the date of the transfer for all purposes. In these states, a disclaimer by an insolvent beneficiary can be used to defeat creditors’ claims but not a federal tax lien.

Question 11

Trusts & Anti-Lapse Statutes

Trusts

Answer 11

The anti-lapse statutes in most states apply only to wills and come into play only if a will beneficiary within a certain degree of relationship predeceases the testator.

Several states and the UPC apply the anti-lapse statute to future interests created in trusts - even to future interests expressly made contingent on survival - unless the trust makes an alternative gift in case of a beneficiary’s nonsurvival.

Question 12

Class Gifts in Private Trusts

Answer 12

Beneficiaries may be unascertainable when the trust is created as long as they are ascertainable when they are to benefit.

The trustee must be able to determine who belongs to the class, and the standards vary:

• At common law, if a private trust exists for the benefit of a class, the class must be reasonably defintite. As long as the class is reasonably definite, the trust may authorize the trustee to exercise their discretion in selecting members to be benefited or may provide that only those who meet certain requirements will benefit.
• Under the UTC, a settlor may empower the trusttee to select the beneficiaries from an indefinite class.

NOTE: If a trust fails for lack of a beneficiary (for example, because the beneficiaries are not ascertainable), a resulting trust in favor of the settlor or their successors is presumed.

Question 13

Invalid Trust Purposes

Answer 13

A trust purpose is invalid if it is:
* Illegal
* Contrary to public policy
* Impossible to achieve
* Intended to defraud the settlor’s creditors or based on illegal consideration

Note that public policy is violated if the purpose of a trust is to: induce others to engage in criminal or tortious acts; encourage immorality; or induce a person to neglect parental, familial, or civic duties.

Question 14

Trust Conditions Contrary to Public Policy

Answer 14

If a condition attached to an interest is against public policy:
* The settlor’s alternative deisre controls, if expressed.
* If the illegal condition is a condition subsequent, the condition is invalidated, but the trust is valid.
* If the illegal condition is a condition precedent, the preferred view is to hold the interest valid unless there is evidence that the settlor’s wish would be to void the beneficiary’s interest altogether if the condition is unenforceable.

Question 15

Rule Against Perpetuities

Trusts

Answer 15

Under the common law Rule Against Perpetuities, a nonvested property interest is invalid unless it is certain to vest or fail no later than 21 years after the death of a person who is alive when it is created.

Many states have adopted a wait-and-see approach or an alternative 90-year vesting period, that would save the interest.

A growing number of states have abolished the RAP as it applies to trusts, permitting the creation of “dynasty” trusts.

Question 16

Acceptance of Trusteeship

Answer 16

A person accepts a trusteeship by:
(1) signing the trust or a separate written acceptance;
(2) substantially complying with the acceptance terms in the trust instrument; or
(3) accepting delivery of the trust property, exercising powers or performing duties as trustee, or indicating acceptance.

Question 17

Qualification of Trustee

Answer 17

Anyone who has capacity to acquire and hold property for their own benefit and has capacity to administer that property may be a trustee.

Question 18

Removal of Trustee

Answer 18

A court can remove a trustee on its own motion or upon request by the settlor, a beneficiary, or a co-trustee. Grounds for removal include:
(1) a serious breach of trust;
(2) serious lack of cooperation among co-trustees;
(3) unfitness, unwillingness, or persistent failure to administer; or
(4) a substantial change in circumstances.

The basic factor considered is whether continuation in office would be detrimental to the trust.

Question 19

Disclaimer or Resignation by Trustee

Answer 19

Before acceptance, a trustee can disclaim or refuse appointment for any reason. However, a trustee cannot accept a trust in part and disclaim it in part.

Under the UTC, once an appointment has been accepted, the trustee can resign by either: (1) giving 30 days’ notice to the qualified beneficiaries, settlor (if living), and co-trustees; or (2) obtaining court approval.

NOTE: Relation Back of Acceptance
A testamentary trust is treated as in existence as of the settlor’s death, and the trustee’s acceptance “relates back” to that date. It is thus possible for a trustee, by accepting, to become liable (in their fiduciary capacity) on tort claims arising prior to the time the trustee accepted.

Question 20

Inter Vivos Trust Created by Present Declartion of Trust

Answer 20

A trust can be created by a person declaring themself trustee of specific property for a beneficiary. The settlor keeps legal title.

If a trust was created by declaration of trust, no conveyance of personal property is needed as long as the property is identified and segregated. Real property should be conveyed from the settlor as an individual to the settlor as a trustee.

Question 21

Inter Vivos Trust Created by Transfer or Conveyance

Answer 21

The settlor creates the trust by transferring legal title of property to a trustee. The settlor may retain or transfer the equitable title, but the settlor conveys legal title.

If the trust was created by conveyance in trust, the settlor must convey the property to the trustee. Real property is conveyed by deed. Personal property is conveyed by physical delivery or an appropriate written assignment. Delivery means placing the trust property out of the settlor’s control.

Question 22

Writing Requirements for Trusts

Answer 22

Most states do not require a writing for a trust of personal property. Oral trusts may be established only by clear and convincing evidence.

For a trust of land, however, a written instrument signed by the person entitled to impress the trust upon the property is commonly required under the Statute of Frauds.

If the holder of the legal title acts as if they are a trustee, part performance will preclude the Statute of Frauds defense.

Most states allow extrinsic evidence where an ambiguity appears on the face of the writing.

Note that an otherwise invalid oral trust of land may be enforced by imposing a constructive trust.

Question 23

Pour-Over Gift from Will to Trust

Answer 23

Under the Uniform Testamentary Additions to Trusts Act, a settlor can make gifts by will to a trust – even an amendable and revocable trust – established during their lifetime. The trust must be clearly identified in the language of the will.

Property goes into the trust as the trust exists at the date of the testator’s death, not how the trust was written at the date when the will was executed. Thus, trust amendments made after the will execution are effective to govern the poured-over property.
If the trust is revoked, the gift fails (lapses).

The trust may remain unfunded during the settlor’s lifetime. The pour-over property can be the initial trust funding if: (1) The trust is identified in the will, and (2) The trust is executed before the testator’s death.

Question 24

Testamentary Trusts

Answer 24

Testamentary trusts are created in the settlor’s valid will.

Trust intent and the essential terms of the trust (trust res, beneficiaries, and trust purpose) must be ascertained from the will itself, from a writing incorporated by reference into the will, or from the exercise of a power of appointment created by the will.

Question 25

Secret Trusts

Answer 25

In the case of a secret trust, the settlor agrees with a will beneficiary that the beneficiary will **hold the property in trust for someone else** – and relies on the beneficiary’s promise – but the will **does not state the trust nature of the gift. ** The intended trust beneficiary may present extrinsic evidence of the will beneficiary’s promise to hold the property in trust. If the promise can be proven by clear and convincing evidence, a **constructive trust** will be imposed on the property in favor of the intended trust beneficiary.

Question 26

Semi-Secret Trust

Answer 26

In a semi-secret trust, the will makes a gift in trust but **fails to name the beneficiary.** The gift fails, and the named trustee holds the property on a **resulting trust** for the testator’s successors in interest.

Question 27

Voluntary Transfers of Benficiary's Interests

Answer 27

Absent restrictions by statute or the trust instrument, a beneficiary may freely transfer their interest in the trust. The assigned interest remains subject to all previous conditions and limitations.

Question 28

Involuntary Transfers of Beneficiary's Interests (Creditors)

Answer 28

Unless statute or the trust provides otherwise, the beneficiary’s creditors may reach the beneficiary’s interest in the trust. The interest is subject to judicial sale. To avoid this, a court may order the trustee to pay the beneficiary’s income to the creditors until the debt is satisfied.

Question 29

Discretionary Trusts

Answer 29

In a discretionary trust, the trustee is given discretion whether to apply or withhold payments of income or principal (or both) to a beneficiary. **CREDITORS RIGHTS:** Before the trustee exercises their discretion to make payments to the beneficiary, the beneficiary’s interest is not assignable and cannot be reached by their creditors. Creditors are usually allowed to attach the beneficiary’s interest but may not compel the trustee to make a distribution. (EXCEPTION: The court can force the trustee to satisfy a judgment or order against the beneficiary for the support or maintenance of the beneficiary’s child, spouse, or former spouse.) **BENEFICIARY'S RIGHTS:** The beneficiary has no right to payment that they can enforce against the trustee. Thus, the beneficiary cannot interfere with the exercise of the trustee’s discretion unless the trustee abuses their power, in which case the court will intervene.

Question 30

Spendthrift Trusts

Answer 30

A spendthrift trust precludes the beneficiary from voluntarily or involuntarily transferring their interest in the trust, and the beneficiary’s creditors are precluded from reaching it to satisfy their claims. The purpose is to protect the beneficiary from their own improvidence. Although a spendthrift trust is a restraint on alienation, most courts uphold spendthrift restrictions.

Question 31

Characteristics of a Spendthrift Trust

Answer 31

With a spendthirft provision, the beneficiary **may not transfer their interest,** and **creditors cannot attach** beneficiary's interest (until income or principal has been paid to the beneficiary). LIMITATIONS: * In most states, settlor cannot use a spendthrift trust to protect their own prtoperty from their own creditors (ineffective) * Typically, a spendthrift clause cannot be used to shield the beneficiary from: judgment or court orders for support or maintenance for the beneficiary's child, spouse or formal spouse, or claims by the government.

Question 32

Support Trusts

Answer 32

A support trust directs the trustee to pay **only so much of the income or principal (or both) as is necessary for the beneficiary’s support.** A support trust may be **mandatory** or **discretionary**. If discretionary, the creditor’s rights are the same as they are for other discretionary trusts Even without a specific spendthrift clause, the beneficiary’s interest in a support trust is such that no one but the beneficiary can enjoy it; the beneficiary’s interest is **not assignable** by definition. Support trusts are, therefore, impliedly spendthrift. If the instrument is silent, the standard of support is the beneficiary’s **accustomed standard of living.**

Question 33

Termination of Modification of Trust By Settlor

Answer 33

**UTC Approach:** a settlor can revoke or amend a trust unless the terms expressly state that it is irrevocable. **Traditional Rule:** a trust is irrevocable unless the settlor expressly reserves the power to revoke or modify the trust Power to revoke includes power to modify

Question 34

Termination or Modification of Trust by Beneficiaries

Answer 34

A trust may be terminated or modified if: * The **settlor and all beneficiaries consent,** even if the modification or termination conflicts with a material purpose of the trust, or * **All beneficiaries** consent, and **no material purpose would be frustrated** ## Footnote Examples of material purposes precluding termiantion: support of beneficiary, distribution at a specific age or specific date, spendthrift provision, discretionary trust When determining consent of all beneficiaries, watch for remote unborn beneficiaries; representative can be appointed to represent interests of minor, unborn, or unascertained beneficiaries

Question 35

Termination or Modification of Trust by Court

Answer 35

A court may: * Modify if trust could have been modified if all beneficiaries had consented and interests of nonconsenting beneficiaries will be protected * Terminate or modify if circumstances unanticipated by the settlor threaten trust purpose * Modify if continuation of trust is impracticable or wasteful * Terminate or modify if value is insufficient to justify administration cost or achieve tax objective * Reform (in some states) if clear and convincing evidence shows settlor's intent and trust were affected by a mistake.

Question 36

Termination of Trust by Trustee

Answer 36

Under the UTC, a trustee may terminate if trust property is less than $50,000 and is insufficient to justify administration cost.

Question 37

Powers of Trustee

Answer 37

The trustee has the following sources of power: * Powers expressly conferred by trust * Powers an individual has over her own property unless limited by trust * Powers appropriate to achieve investment, management, and distribution of trust property not forbidden by trust * Powers conferred by UTC unless limited by trust ## Footnote The UTC confers many powers on the trustee, including the power to: collect and hold trust assets; operate a business; acquire an undivided interest in a trust asset; invest trust assets; buy, sell, or encumber trust assets; enter into a lease; vote securities; pay taxes and assessments; insure assets; make distributions; prosecute and defend actions; etc.

Question 38

Duties of Trustees

Answer 38

The trustee has these specific duties: * **Duty to administer trust** -- must act in good faith & in prudent manner, in accordance with trust's terms & purposes & beneficiaries' interests * **Duty of loyalty** -- no self-dealing absent court approval or express waiver in trust * **Duty to report** -- keep beneficiaries reasonably informed * **Duty to separate trust property** -- no commingling with own property or other trusts' property * **Duty to enforce claims and defend trust from attack** * **Duty to preserve property and make it productive** -- investments must be prudent; trustee must use reasonable care, skill and caution

Question 39

Trustee's Duty to Administer Trust

Answer 39

The trustee has a duty to **personally** administer the trust in **good faith** and in a **prudent manner,** in accordance with the **terms & purposes** of the trust instrument and the **interests of the beneficiaries.** If a trustee has **special skills or expertise,** they will be held to a higher standard. If there is more than one beneficiary, the trustee must act **impartially,** taking into account any of their differing interests. Generally, a trustee **may not delegate discretionary functions** (such as the decision to make or not make distributions). To do so would make the trustee a guarantor for any losses caused by the improper delegation.

Question 40

Trustee's Duty of Loyalty

Answer 40

Absent court approval or express waiver in the trust instrument, a trustee **cannot** enter into any transaction in which the trustee is dealing with the trust in their individual capacity. A trustee owes a **duty of undivided loyalty** to the trust and its beneficiaries. * Cannot buy assets from or sell assets to the trust * Cannot borrow from trust or loan to trust * Cannot use trust assets to secure a personal loan * Cannot personally gain through their position as trustee * Corporate trustee cannot buy (but may retain) own stock

Question 41

Trustee's Duty to Report

Answer 41

Trustee must: (1) provide the qualified beneficiaries with the trustee’s name, address, and telephone number; (2) respond to beneficiary requests for information about the trust’s administration and provide a copy of the trust instrument if requested; and (3) furnish an annual accounting of the trust.

Question 42

Trustee's Investment Responsibilities | Based on the Duty to Preserve Trust Property and Make it Productive

Answer 42

Most states use the Uniform Prudent Investor Act (UPIA) STANDARD OF CARE: A trustee must exercise **reasonable care, skill, and caution** when investing and managing trust assets. PORTFOLIO APPROACH: Investment decisions must be evaluated in the context of the **entire trust portfolio** (corpus) and as part of an **overall investment strategy** that has risk and return objectives reasonably suited to the particular trust. Thus, some speculation may be appropriate or even required. DIVERSIFICATION: A trustee must diversify the investments of the trust unless they reasonably determine that the purposes of the trust are better served without diversification. FACTORS CONSIDERED: General economic conditions; The possible effect of inflation or deflation; The expected tax consequences of investment decisions or strategies; The role that each investment plays within the overall trust portfolio; The expected total return from income and the expected appreciation of capital; Other resources of the beneficiaries; Needs for liquidity, regularity of income, and preservation or appreciation of capital; An asset’s special relationship or value to the purposes of the trust or to one or more of the beneficiaries (for example, a family home or heirloom) ## Footnote A trustee may delegate investment and management functions but only if a prudent trustee of comparable skills could properly delegate under the circumstances. Must act prudently in (1) selecting an agent; (2) establishing the scope and terms of the delegation; and periodically reviewing the agent's actions.

Question 43

Remedies for Breach of Trust

Answer 43

If the trustee commits, or is about to commit, a breach of trust duties, the court may: (1) enforce specific performance of the trustee’s duties; (2) enjoin the trustee from committing a breach of trust; (3) compel the trustee to pay money or restore property; or (4) suspend or remove the trustee.

Question 44

Damages to Beneficiaries for Breach of Trust

Answer 44

If a trust commits a breach of trust, the trustee is liable to the beneficiaries for the greater of: (1) The amount necessary to restore the trust property and distributions to what they would have been absent the breach, or (2) The trustee’s profit from the breach. A trustee is liable to a beneficiary for any profit arising from administration of the trust, even if there was no breach

Question 45

Trustee's Liability to Third Party for Contracts on Behalf of the Trust Estate

Answer 45

The general rule is that a trustee may be sued on the contract in the trustee’s **fiduciary capacity.** A third party may sue the trustee **personally only if** the trustee, in entering into the contract, **failed to reveal** the fiduciary relationship either by indicating their role as trustee in their signature or by referring to the trust. If the contract was properly entered into for the trust and the trustee as **not in breach,** the trustee is entitled to **indemnification or reimbursement** from trust property.

Question 46

Trustee's Liability to Third Parties in Tort Claims

Answer 46

A third party injured in tort can sue the trust estate by proceeding against the trustee in their **fiduciary capacity.** The third party may also sue the trustee personally if the trustee is **personally at fault,** but not by reason of respondeat superior

Question 47

Distinctive Rules for Charitable Trusts

Answer 47

The rules are basically the same for private and charitable trusts, but the rules governing charitable trusts differ in three important ways: (1) a charitable trust must have indefinite beneficiaries, (2) it may be perpetual, and (3) the cy pres doctrine applies.

Question 48

Cy Pres Doctrine

Answer 48

When a charitable purpose selected by the settlor is **impracticable, unlawful, impossible to achieve or wasteful,** the court may select an alternative under the doctrine of cy pres, which means **“as near as possible,”** by ascertaining the settlor’s primary purpose. This doctrine applies to outright charitable gifts as well as to charitable trusts. **Traditionally,** to apply cy pres, the court had to determine that the settlor had a **general charitable intent** (that is, the settlor did not intend to limit their gift to a particular charity regardless of the circumstances). However, under the **UTC,** the settlor’s **general charitable intent is conclusively presumed.** Thus, unless the trust terms expressly provide otherwise, application of the cy pres doctrine is **mandatory,** and the court must reform the trust. The court has discretion to determine the settlor’s primary charitable intent.

Question 49

Resulting Trusts

Answer 49

Resulting trusts involve **reversionary interests** and are based on the **presumed intent of the settlor.** Resulting trusts are of **three types:** (1) purchase money resulting trusts (PMRTs) (2) resulting trusts arising in failure of an express trust, and (3) resulting trusts arising from an incomplete disposition of trust assets (that is, excess corpus). The **settlor** is the beneficiary of a resulting trust. If the settlor is deceased, the settlor’s **successors in interest** (heirs or beneficiaries under the settlor’s will) are the beneficiaries.

Question 50

Constructive Trusts

Answer 50

A constructive trust is not really a trust but rather is a **flexible equitable remedy** to **prevent unjust enrichment** resulting from **wrongful conduct,** such as fraud, undue influence, or breach of a fiduciary duty. Equity turns the holder of legal title into a trustee when they may not in good conscience retain the beneficial interest to the property. The constructive trustee’s only duty is to convey the property to the person who would have owned it but for the wrongful conduct.