Trusts

Question 1

What is a trust?

Answer 1

A trust is an arrangement for making gifts of property and for management of assets, under which the trustee holds legal title to trust assets for the benefit of beneficiaries.

Question 2

What is required to have a valid trust?

Answer 2

To have a valid trust:

1. settlor (grantor) delivers title to trust property to a trustee for the benefit of beneficiaries
2. settlor has intent to create a trust
3. trust has lawful purpose
4. SoF

Question 3

What is the delivery requirement?

Answer 3

A valid trust consists of a settlor who delivers title to trust property to a trustee for the benefit of beneficiaries with intent to create a trust.

Delivery requirement is not for self-declarations of trust (“I declare myself a trustee”) or testamentary trust, but this is required for inter vivos trusts. This requires the delivery of the subject matter of the trust with the intent to give legal title to the trustee.

*Legal title must be to a specific interest in property

Question 4

W wrote a document that said: “I hereby create a trust for the benefit of my maid, and shall pay her $3000/month from dividends paid on stock that I own. After my death, Bank as trustee will continue to pay maid $3000/month until her death.”

Is this a valid trust? There is no cash, stock, or other property set aside.

Answer 4

This is not a valid trust. A valid trust consists of a settlor who delivers title to trust property to a trustee for the benefit of beneficiaries with intent to create a trust.

Here, W is the settlor. The issue is delivery because the trustee is named (Bank) and the beneficiary is named (maid) and there is a purpose (support the maid). This is an improper delivery because the trust property at issue (dividends on stock) is segregated and identified - the trust duties have to relate to identified property.

Question 5

Why should you look out for promises and/or contracts to hold property for trusts?

Answer 5

Look to see if there is consideration. If there is consideration, then the trust duties automatically attach when the property is received.

Question 6

What and who can be a trustee?

Answer 6

A trustee has the legal capacity to deal with property and must have capacity to contract and to execute a deed.

People, banks, and trust companies can serve as trustees and charities can be trustees only for charitable trusts.

Question 7

Which trustees have to give bond?

Answer 7

Human trustees must post a fiduciary surety bond to secure the faithful performance of her duties unless the settlor waived this.

A corporate trustee (bank or trust company) does not have to give bond because it is presumed that they have adequate assets.

Question 8

What if a trust does not name a trustee, but is otherwise a valid trust?

Answer 8

No trust ever fails because of lack of trustee. The court will appoint someone to execute the trust OR if the trust was created by will the court will appoint the executor.

Question 9

What happens when a person is appointed to be trustee but he does not want to?

Answer 9

The court cannot compel someone to serve as trustee - cannot be compelled to accept fiduciary responsibilities and duties. Court instead appoints another trustee.

Question 10

How does a trustee accept their role as a trustee?

Answer 10

To accept being a trustee:

1. Trustee’s signature OR
2. Accept by conduct (exercise trust power or perform trust duty)

Question 11

How does a trustee resign from their role?

Answer 11

To resign, a trustee needs court approval showing that he can no longer appropriately serve as trustee AND give an accounting of: 1) property initially received, 2) receipts and disbursements, and 3) property now on hand and liabilities.

Question 12

Mother conveys land to son: “John Smith, trustee.”

The deed does not have any powers or terms and the mother dies.

Was a valid trust created?

Answer 12

There is not a valid trust. A valid trust consists of a settlor who delivers title to trust property to a trustee for the benefit of beneficiaries with intent to create a trust.

The mother wrote three words into a deed concerning a specific property, but she did not name beneficiaries or indicate the trust’s purpose.

Mother’s land will pass to her estate either by her will or intestacy.

Question 13

A’s title of Blackacre to B, as trustee for benefit of son C. “C has power to manage and control the use of Blackacre and B as trustee has no powers or active duties over the property.”

Is there a valid trust here?

Answer 13

This is not a valid trust. A valid trust consists of a settlor who delivers title to trust property to a trustee for the benefit of beneficiaries with intent to create a trust.

A is the settlor and the titled property is Blackacre. The beneficiary is stated C, and is to take care of C.

But this trust is invalid because if the named trustee has no powers or active duties to perform, then there is not a trust. The trustee must owe fiduciary duties.

Question 14

What is a spendthrift clause?

Answer 14

This is a clause that prevents beneficiary from voluntarily or involuntarily transferring his interest in the trust.

For instance:
“No beneficiary shall have the power to transfer his or her interest.”

Question 15

What are the exceptions to the spendthrift clause?

Answer 15

A spendthrift clause prevents beneficiary from voluntarily or involuntarily transferring his interest in the trust. The exceptions to this are: when the settlor is named as a beneficiary OR if the trust is revocable by the settlor.

If there is a spendthrift clause, creditors can collect for necessaries and by claimants of child support. These are subject to federal tax liens.

Question 16

What is the rule regarding sole trustee is the sole beneficiary of a trustee?

Answer 16

If the sole trustee is the sole beneficiary, then there is no trust.

Question 17

What is it called when a trust fails for some reason?

Answer 17

A trust that has failed for some reason is a resulting trust.

Question 18

“I hereby create a trust for my best friends.”

Is this a valid trust, in terms of the recipients?

Answer 18

No. To have a valid trust, there must be ascertainable beneficiaries named. You cannot use outside testimony to figure out who the settlor was talking about.

Question 19

How can someone intend to create a trust?

Answer 19

A trust can only be created if the settlor manifests an intention to create a trust for some purpose. If there’s precatory language (“it is my wish and desire” “hope” “I would like”), then it does not create an enforceable duty.

Question 20

Trusts must be created for a lawful objective or purpose. What isn’t a lawful objective or purpose for trusts?

Answer 20

Nothing hella illegal, spiteful (destroy property to piss out neighbors), or against public policy

Question 21

Trusts must be created for a lawful objective or purpose. What is something against public policy that trusts cannot be created to do?

Answer 21

A trust cannot condition the beneficiary’s benefit on encouraging divorce or is a total restraint on marriage.

*Partial restraints on marriage are fine.

Question 22

Do trusts need to be in writing?

Answer 22

All trusts must be in writing (e.g. trusts of land, Statute of Frauds).

The exceptions to this rule:
- a transfer of personal property (stocks and bonds) to a trustee other than the settlor or beneficiary + declaration of intent to create a trust simultaneously with or prior to transfer

Question 23

Which trusts are revocable?

Answer 23

Texas law makes all inter vivos trusts revocable and amenable by settlor unless expressly made irrevocable and unamendable.

Question 24

How is a trust revoked or amended?

Answer 24

To revoke or amend a trust, the revocation or amendment must be made in writing by settlor.

If the settlor is incapacitated, a court can revoke the trust if in ward’s best interest.

Divorce revokes all revocable trust provisions in favor of the former spouse and relatives of a former spouse.

Question 25

"income to me, W, for life, then on my death the trustee shall distribute the trust principal to my son." Is this a valid trust?

Answer 25

Yes, this is a valid trust. A valid trust consists of a settlor who delivers title to trust property to a trustee for the benefit of beneficiaries with intent to create a trust. W is the settlor and she delivered trust property (not stated, specified securities) to a specific trustee for the beneficiary, her son. The purpose is stated: to provide her own income and then go toward her son. Even though the settlor is a benficiary, she is the sole beneficiary during her life and then the other beneficiary is her son upon her death.

Question 26

What if a settlor names herself, then upon her death the trustee will distribute to her descendant. Is this a valid trust?

Answer 26

Yes, this is an example of a valid trust in anticipation of settlor's future incapacity and avoids the restrictions of a guardianship. A settlor can be a beneficiary as long as there is another beneficiary in the trust, and even if the settlor retains: - income for life - power to revoke, alter, or amend the trust - power to control trustee and trust's admin - settlor can name herself as trustee as long as she has capacity

Question 27

What is a pourover will?

Answer 27

A pourover will is a testamentary gift to a trust and provides a means for adding testamentary assets to a trust created by a testator during lifetime. The gift is valid even if the trust is subject to revocation or amendment and is later amended and even if trust is unfunded. Amendments and revocations to trust are controlled by trust and not wills law.

Question 28

Father has a life insurance policy that names his minor child as a beneficiary. How should the father have the proceeds of this life insurance policy be paid in a trust to his daughter?

Answer 28

Father should create an unfunded revocable life insurance trust and name the trustee as beneficiary. He could also just name "the trustee named in my will" as policy beneficiary.

Question 29

How do you create a right of survivorship?

Answer 29

Use explicit language to create a right of survivorship, like "on the death of one party, all sums in the account shall vest in and belong to the surviving party" or "with the right of survivorship."

Question 30

When it comes to joint accounts, what is the rule for spouses when it comes to joint property?

Answer 30

If there is an amount in a joint bank account that is community property, both spouses must sign agreement. Otherwise surviving spouse cannot gain from right of survivorship.

Question 31

Father executed a power of attorney that named his son as agent. Father has severe health problems and the daughter has reason to believe that the son is abusing the power of attorney. Can the daughter have standing to take action without first being appointed guardian?

Answer 31

Yes. She may review her brother's (the agent's) conduct because she is a beneficiary of her dad/the principal's death (will or otherwise).

Question 32

Can someone with the power of the attorney compel a bank to honor the power of attorney?

Answer 32

Yes. Someone with the power of attorney can compel a bank to honor the power of attorney. Unless there are specified grounds for refusal, the bank must either accept the power, request certification that the power is valid, or request an attorney's opinion.

Question 33

What is a PMRT?

Answer 33

PMRT = purchase money resulting trust A purchase money resulting trust is when one party provides the purchase price of property and title taken in the name of another unrelated party.

Question 34

How can the presumption of a PMRT be rebutted?

Answer 34

A PMRT is a purchase money resulting trust. It can be rebutted by showing that a gift or loan was intended. The burden is on the purchaser. The presumption does not arise if it's the purchaser's child, spouse, or other relative.

Question 35

What is a constructive trust?

Answer 35

A constructive trust is an equitable remedy whose object is to prevent unjust enrichment. This enables the injured party to recovery the property in dispute and avoids having to settle for judgment for money damages. This requires wrongful conduct and unjust enrichment.

Question 36

The individual named as trustee of a trust: A May never be a beneficiary. B May be a beneficiary, as long as there are at least two other beneficiaries. C May be a beneficiary, but may not be the settlor. D May be a beneficiary, as long as the individual is not the sole trustee and sole beneficiary.

Answer 36

D. Being a beneficiary does not disqualify a person from also acting as trustee, as long the person is not the sole trustee and sole beneficiary. If a person is the sole trustee and sole beneficiary, there is no trust.

Question 37

Which of the following groups does NOT represent a definite class of beneficiaries? A “My descendants.” B “My friends.” C “The employees of my company.” D “My daughter’s family.”

Answer 37

A trust’s beneficiaries may be a large group, as long as the individual members of the group are readily ascertainable. A trust for the benefit of “my friends" has been held to be too indefinite. Trusts for the benefit of “my descendants” or “my daughter’s family,” though broad and ill defined, are invariably sustained because it is possible to determine who constitutes that group.

Question 38

What is the result if a settlor transfers assets into a spendthrift trust for his own benefit?

Answer 38

A settlor cannot transfer assets into a spendthrift trust for his benefit, hoping to immunize them from his creditor’s reach. A spendthrift provision is invalid with respect to any interest retained by the settlor. To the extent that the settlor has retained an interest in the trust’s income or principal, his creditors can reach that interest.

Question 39

Proceeds from a life insurance policy or other contract in which the trust or trustee is named beneficiary are allocated to:

Answer 39

Under the Uniform Principal and Income Act ("UPIA"), proceeds from a life insurance policy or other contract in which the trust or trustee is named beneficiary are allocated to the principal. If, however, a contract insures the trustee against loss of profits from a business, the proceeds are allocated to income.

Question 40

Can a trustee borrow trust funds?

Answer 40

A trustee may not borrow trust funds, no matter how fair the interest rate and no matter how well-secured the loan. A trustee may not loan his personal funds to the trust. Any interest paid on an improper loan must be returned to the trust, and any security interest obtained in connection with the loan is invalid.

Question 41

Can the trustee use trust assets to secure a personal loan?

Answer 41

A trustee cannot use trust assets to secure a personal loan, and the lender does not obtain a valid security interest if he knew or had reason to know that the assets belonged to a trust. A trustee cannot enter into any transaction in which she is dealing with the trust in her individual capacity, because a trustee “cannot wear two hats” and in the same transaction represent both her personal interests and the interests of the trust. Beneficiaries have a choice when the trustee breaches her duty by self-dealing; they may ratify the transaction or hold the trustee personally liable.

Question 42

What are four distinctive rules that apply to charitable trusts?

Answer 42

The four distinctive traits of charitable trusts are: 1. May be perpetual - not subject to Rule Against Perpetutities 2. Charitable purpose - substantial social benefit. 3. For a reasonably large segment of public. 4. If charitable purpose can't be accomplished anymore, may be reformed in judicial proceedings under cy pres (aka divert funds to another charitable activity)

Question 43

Charitable trust: what is cy pres?

Answer 43

Cy pres is a doctrine for charitable trusts that requires a judicial proceeding to determine the charitable trust's future when its charitable purpose cannot be accomplished anymore. *This is typically for when the trust purpose has changed.

Question 44

Who can enforce a charitable trust?

Answer 44

The attorney general is a proper party to any suit concerning a charitable trust. *Only attorney general and trust settlor have standing to bring an action concerning a charitable trust.

Question 45

What's the Rule Against Perpetutities?

Answer 45

LIB + 21 Years No interest is good unless it must vest, if at all, within 21 years after some life in being at the interest's creation. The purpose of RAP is to limit the duration of non-charitable trusts and place a check on attempts to tie up property through the creation of perpetual trusts. RAP does not apply to charitable trusts.

Question 46

What is the cy pres like rule for trusts?

Answer 46

*This only relates to non-charitable trusts. RAP does not apply to charitable trusts. The cy pres like reform statute will reform or construe a will or trust that violates RAP so as to carry out the settlor's general intent as far as possible within the period of the Rule (lives in being + 21 years).

Question 47

If the named charitable beneficiary under a trust ceases to exist or ceases to qualify as a charity for federal income tax purposes, the trustee may, without court approval:

Answer 47

name new charity as beneficiary. Trustee must give notice of the selection to the attorney general and the replacement charity must have same or similar charitable purpose as the failed charity.

Question 48

What's the TX Trustee Powers Act?

Answer 48

If a fee simple owner can, so can a trustee. The Texas Trust Code, which applies to all trusts in TX except to the extent the trustee's powers are expanded or limited by the settlor, gives broad fiduciary powers to trustee. *Basically everything but self-dealing and imprudent investments

Question 49

What are 6 powers a trustee may exercise in managing real property held in trust?

Answer 49

1. sell property 2. lease property 3. give a mortgage 4. make improvements and repairs 5. give mineral leases 6. partition and subdivide property

Question 50

What are trust beneficiaries' rights as it relates to accounting?

Answer 50

Beneficiaries are entitled to an accounting, on demand, 12 months after the trust was created.

Question 51

If trustee breaches any fiduciary duty, the beneficiaries can:

Answer 51

1. ratify the transaction and waive the breach of trust 2. can bring surcharge action for the resulting loss. 3. if trustee still has possession of the property, beneficiary can petition for the imposition of a constructive trust

Question 52

What does a trustee have to establish under the Uniform Prudent Investor Act (UPIA)?

Answer 52

Under the UPIA, trustee must establish and maintain a custom-tailored investment strategy that will meet settlor's intent as to the purposes of the particular trust, taking into account: - general economic conditions - possible effect of inflation/deflation - expected tax consequences of investment strategies - role that each investment plays within the overall trust portfolio - expected total return from income and capital gain - needs for liquidity *Prudence standard measured by conduct when investment decision was made, not outcome or performance.

Question 53

Under UPIA, investment returns are measured by:

Answer 53

total return, including appreciation and capital gain

Question 54

Under UPIA, trustee can exercise adjustment power in favor of income beneficiary where appropriate and can allocate capital gain and principal to income. What is allocated to income?

Answer 54

interest, rental income, cash dividends on stock are allocated to income. All money received from an entity is allocated to income.

Question 55

Under UPIA, trustee can exercise adjustment power in favor of income beneficiary where appropriate and can allocate capital gain and principal to income. What is allocated to principal?

Answer 55

eminent domain condemnation award, insurance proceeds for trust property destroyed by natural disaster are allocated to principal. All receipts from an entity other than money are allocated to principal.

Question 56

What's the rule regarding equitable allocations?

Answer 56

An allocation is presumed to be equitable if it follows the federal income tax depletion allowance rules.

Question 57

What is the rule regarding trustee's expenses?

Answer 57

One-half of trustee's commissions accounting, judicial proceedings for to income; the other one-half is charged against principal

Question 58

Can a beneficiary bring a direct action against a third party who causes injury to trust property?

Answer 58

No. The trustee holds legal title so he has standing to sue. Exceptions: trustee is unwilling or unable to bring the action or 3rd party participated with trustee in committing breach of trust

Question 59

How do you terminate or modify a trust?

Answer 59

1. A trust terminates automatically according to its terms. To terminate or modify: 1. Trustee or beneficiary petitions and court may order that the trustee should be changed or that trust terms may be modified if: a) trust's purposes or any of its provisions has been fulfilled or become illegal or impossible to fulfill b) changed circumstances not known or anticipated by settlor + modification or termination will further trust's purposes c) achievement of tax purpose 2. Termination of uneconomic trust - give notice to beneficiaries, can terminate without court approval if trust is less than $50,000

Question 60

After a trust terminates, a trustee may continue to exercise trust power for the reasonable time needed to:

Answer 60

a) wind up trust affairs, and | b) make distributions to beneficiaries

Question 61

How can trusts be made? Hint: 4

Answer 61

1. self-declaration of trust 2. transfer to a third person named as trustee 3. will 4. exercise of power of appointment

Question 62

Is consideration required to create a trust?

Answer 62

No, unless it is a promise to create a trust in the future.

Question 63

T/F: A debtor cannot hold his own debt in trust.

Answer 63

True.

Question 64

T/F: Texas does not recognize a trust by estoppel.

Answer 64

True. Basically, no trust will fail for lack of trustee.

Question 65

Is a trust that has a provision calling for the destruction of property enforceable?

Answer 65

No, it's void.

Question 66

To determine if there is a valid private trust, what should you look for?

Answer 66

1. settlor with legal capacity 2. delivery of assets (only if trustee is someone other than the settlor) 3. trust property 4. trustee (inter vivos only) 5. intent to create a trust 6. ascertainable beneficiaries 7. valid trust purpose (not illegal, tortious, or against public policy)

Question 67

T/F: All Texas trusts are revocable by the settlor unless expressly made irrevocable.

Answer 67

True. Any reasonable method can be used to amend a revocable trust.

Question 68

What is the positive thing about a revocable trust?

Answer 68

can avoid guardianship and probate issues and allows spouses to integrate their respective interests in community assets

Question 69

If a settlor can get income for life, is the trust valid?

Answer 69

Yes, it can still be valid.

Question 70

If a settlor has the power to revoke or terminate the trust, is the trust valid?

Answer 70

Yes.

Question 71

If a settlor has the right to exercise a power or option with respect to life insurance proceeds or employee benefits paid to the trust, is the trust still valid?

Answer 71

Yes.

Question 72

Does the settlor having the power to add property to the trust make the trust invalid?

Answer 72

No.

Question 73

How can a widow access a joint bank account?

Answer 73

For the bank account to have a right of survivorship, it must be expressly stated in an agreement by the party who dies (or both parties if it's community property funds) and states that the account is to "vest in and belong to the surviving party."

Question 74

What happens to honorary trusts, aka created with an object as beneficiary?

Answer 74

This is not enforceable but the "trustee" is permitted to perform. An exception is a (perpetual care) trust for maintenance of cemetery plots.

Question 75

What is a resulting trust?

Answer 75

It arises from the presumed or implied intention of the owner of the property, rather than expressed intent. The Trust Code does not apply to these and the resulting trustee's duty is to hold and convey the property according to the demands of the beneficiary.

Question 76

How can a purchase money resulting trust (PMRT) be rebutted?

Answer 76

by showing that a gift or a loan was intended. Thus the purchase price of property and title taken in the name of another unrelated property was intended as a gift or loan.

Question 77

What is a constructive trust?

Answer 77

It occurs when a party would be unjustly enriched as a result of wrongful conduct. It does not fall under the Trust Code.

Question 78

T/F: If a trustee is self-dealing, the no further inquiry rule applies.

Answer 78

True. A beneficiary just has to show that the trustee engaged in a self-dealing transaction that was not authorized by the settlor or court. There is no defense, just damages.

Question 79

S creates Trust 1 (irrevocable) and Trust 2 (revocable) for herself and her mom M. The trustee is Bank. Each trust is authorized to pay S or M for their support, health, and maintenance. Can these debts be satisfied with principal and/or income and from which trust: IRS tax lien on S's unpaid taxes Judgment against S for unpaid child support

Answer 79

Yes. From Trust 1 (irrevocable), trustee Bank has unlimited discretion and can pay S's creditors. Trust 2 (revocable) basically means S is the owner and can revoke the trust; thus her debts can be paid from here. The unpaid child support can be paid are not related to health and maintenance so it can be paid with trust's income, not principal. The IRS lien can be paid from principal because it involves maintenance.

Question 80

S creates Trust 1 (irrevocable) and Trust 2 (revocable) for herself and her mom M. The trustee is Bank. Each trust is authorized to pay S or M for their support, health, and maintenance. Can these debts be satisfied with principal and/or income and from which trust: Money judgment against M for unpaid hospital bill Unpaid charges incurred by M for costume jewelry

Answer 80

M cannot compel distribution from trust and neither can her creditors. Therefore, M cannot have either Trust pay for the unpaid charges for the costume jewelry. But Trust principal and/or income can pay for M's expenses if related to health and maintenance, such as the unpaid hospital bill. This bill would be paid from either trust's principal.