Trusts 2 Flashcards
(21 cards)
What is a mandatory trust vs. discretionary trust?
What standard is a trustee held to? (EP)
Mandatory trust—requires the trustee to distribute all trust income.
Discretionary trust—the trustee is given the power to distribute income at their discretion.
The trustee is subject to an abuse of discretion standard.
What are the two different types of beneficiaries? (EP)
Income Beneficiaries—receive income from the trust
Remainder Beneficiaries—entitled to the trust principal upon termination of the trust.
What is the rule on trust property for the creation of a trust? (EP)
When the trust is created, there must be some property that is put into the trust.
May be real property, money, personal property, intangibles, partial interests, or future interests (whether vested or contingent)
Note: If a trust is invalid due to lack of property being put into it when it is first created, and the settlor later puts property into the trust and manifests intent to create the trust at the time the settlor put the property in, it will be a
valid trust.
What are the elements necessary to have a valid express trust? (EP)
1) Intent (The settlor must intend to make a gift in trust. The settlor’s intent may be manifested orally, in writing, or by conduct.)
2) Trust property
3) Valid trust purpose (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).
Note: Terms that violate public policy will be stricken from the trust; the trust will not fail overall unless the removal of the terms is fatal.
4) Ascertainable beneficiaries (The beneficiaries must be identifiable. The settlor may refer to outside writings or acts to identify beneficiaries.)
5) Writing requirement
What are the four exceptions to ascertainable beneficiaries? (EP)
1) Indefinite Class: Trustee can select a beneficiary from an indefinite class (e.g., “my friends”), unless the trustee must distribute equally to all members of the indefinite class (not valid).
2) Unborn children: Trusts for the benefit of unborn children are valid, even though the beneficiaries are not yet ascertainable at the time the trust is created.
3) Class Gifts: Trusts for a reasonably definite class (e.g., “my brothers,” or “my
grandchildren”) will be upheld.
4) Charitable trusts: Must not have individual ascertainable beneficiaries.
What are the writing requirement rules for a valid express trust? (EP)
1) If trust involves real property, it must be in writing to comply with the Statute of Frauds.
2) If the trust is a testamentary trust (takes effect upon the death of settlor) then the testamentary trust does need to meet the statute of wills in the jurisdiction, which may mean it needs to be in writing and meet other requirement (e.g., signed with witnesses). - not commonly seen
Otherwise, no writing is required to find a trust. If dealing with a non-testamentary trust, or an amendment to a non-testamentary trust, there is no requirement that will formalities be met.
What are the rules to remember regarding the timing and formality of pour over provisions in relation to inter vivos trusts? (EP)
A will may “pour over” assets into a trust, even if the trust is not in existence when the will is executed. It can be created before, at the same time, or after the will is created. Later amendments to the trust are also valid.
Inter vivos trust does not need to be executed with the same formalities as a will.
What are examples of charitable purposes for a charitable trust? (EP)
Purposes considered to be charitable include the relief of poverty, the advancement of education or religion, and other purposes benefiting the community at large or a particular segment of the community.
Note: Funding a specific political party is not a charitable purpose.
Modern trend is to try and characterize trusts as charitable if possible
What are the two approaches the court will use to analyze intent for the cy pres doctrine? (EP)
A court will analyze whether the trust has a specific intent to help one charity or a general intent to help charity.
If there is specific intent, the court may not modify the trust; the trust will be
terminated and become a resulting trust.
If there is general intent, the court will substitute a similar charity.
What is an honorary vs. remedial/resulting trust (not often tested)? (EP)
Honorary Trust: An honorary trust is a legally enforceable trust that is not created for charitable purposes and has no definite human beneficiaries.
If something fails as a charitable trust, it may be viewed as an honorary trust.
Remedial Trust/Resulting Trust: If a trust fails in some way or when there is an incomplete disposition of trust property, a court may create a resulting trust requiring the holder of the property to return it to the settlor or to
the settlor’s estate.
What are a creditor’s powers in a support trust vs. discretionary trust? (EP)
Creditors cannot reach the assets of a support trust, except to the extent that a provider of a necessity to the beneficiary can be paid directly by the trustee.
- If the trustee exercises his discretion to pay, then the beneficiary’s creditors have the same rights as the beneficiary, UNLESS a spendthrift restriction exists.
- If the discretion to pay is not exercised, then the beneficiary’s interest cannot be reached by his creditors.
What are trusts presumed to be under the modern rule? (EP)
Under the modern rule, trusts are presumed to be both 1) revocable and 2) amendable (unless there is a writing
to the contrary)
When can a trust be modified/terminated by beneficiaries? What is the most common example of this? (EP)
A noncharitable irrevocable trust can be terminated or modified by consent of all
beneficiaries if a court concludes that continuance is not necessary to achieve any “material purpose” of the trust.
Ex: The most common example of a trust that has an unfulfilled material purpose is one that has both income and remainder beneficiaries; both the present and the future beneficiaries
must agree for the trust to be terminated prematurely.
Note: This falls under the “All beneficiaries consent and the court decides continuation isn’t necessary” in main deck
What is the main reason that a court can terminate a trust? (EP)
Unanticipated Changes: A court can modify the administrative or dispositive terms of a trust or terminate it if because of circumstances not anticipated by the settlor, modification or termination would further the purpose of the trust
What are the two conditions that must be satisfied for a remainder to be considered vested?
A remainder is considered vested if the holder of the interest is 1) ascertainable and 2) there is no express condition precedent required for the interest to become possessory.
What is a disclaimer?
How must a valid disclaimer be made?
What are the two main scenarios? (EP)
Almost all states have enacted statutes that permit beneficiaries of trusts to disclaim their interest in the trust property.
In most states, a disclaimer is not effective unless it is in writing within nine months after the future interest would become “indefeasibly vested.”
1) If the income beneficiary of a trust disclaims her interest, then the trust principal becomes immediately distributable (accelerates) to the remainder beneficiaries if the remainder is vested (if the remainder is contingent upon a condition, the remainder will not accelerate).
2) When the holder of a future interest effectively disclaims that interest, the disclaimant is deemed to have predeceased the life tenant. In this case, the interest will revert to the testator or will go to the future interest holder’s issue (if anti-lapse rules apply)
What is the general rule for class gifts to “surviving children”? (EP)
See outline for more details
Unless the trust instrument provides otherwise, the general rule is that a class gift from a parent to surviving children is limited to only the children that outlive the settlor.
What are the three main duties a trustee owes? (EP)
What are examples of a trustee’s self-dealing transactions ? (EP)
1) Duty of loyalty: Duty to administer trust in good faith (subjective standard) and to act reasonably (objective
standard).
2) Duty of prudence (see deck)
3) Duty to be impartial (Balance interests of the present beneficiaries and treat them equally unless the trust provides otherwise)
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Examples of self-dealing violating the duty of loyalty:
- Buying/selling trust assets;
- Selling property between trusts that trustee manages;
- Borrowing from or making loans to trust;
- Using trust assets to secure personal loan;
- Engaging in prohibited transactions with friends/relatives; or
- Otherwise acting for personal gain through trustee position
What are two other duties a trustee should abide by? (EP)
1) Duty to Disclose: Disclose complete and accurate information about nature and extent of the trust property, including allowing access to trust records and accounts.
2) Duty to Account: Periodically account for actions taken on behalf of the trust.
General Starting Point for Essay Analysis:
How should assets from a trust be allocated?
How must the trustee treat approach the distribution between present and future trust beneficiaries?
What is the traditional approach?
What is the modern (UPAIA) approach? How is stock distribution treated?
All assets received by a trustee must be allocated to either income or principal.
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.
The traditional approach assumed that any money generated by trust property was income and that any money generated in connection with a conveyance of trust property was principal.
Under the modern approach, the trustee can recharacterize items and reallocate as reasonably necessary to fulfill the trust purposes. Stock distribution, whether classified as a dividend or a split, is typically treated as a distribution of principal.
What is a class gift?
When is it vested?
When is it vested subject to open/partial disinvestment?
A class gift gift to a group of individuals with an automatic right of survivorship is a class gift.
A class remains open and can admit new members after the trust is created until at least
one class member is entitled to possession or the preceding interest terminates.
When one class member is entitled to possession, it becomes vested
However, if the class of beneficiaries can still expand, this is considered a vested remainder subject to open/partial disinvestment, whereby any future class members added will partially disinvest the first class member’s share.