Trusts and Future Interests

Question 1

Trustee’s Prudent Investor Rule

Answer 1

The Uniform Prudent Investor Act (the “UPIA”) requires the trustee to act as a prudent investor would
when investing his own property. The trustee 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. Determinations of compliance under the UPIA are made with reference to the facts and circumstances as they existed at the time the action was made, and they do not utilize
hindsight. Part of being prudent is taking care to make informed decisions regarding the investment
scheme and/or delegating such decision-making to an expert. In assessing whether a trustee has
breached this duty, the UPIA requires consideration of numerous factors, including (i) the distribution
requirements of the trust, (ii) the general economic conditions, (iii) the role that the investment plays in
relationship to the trust’s overall investment portfolio, and (iv) the trust’s need for liquidity, regularity of income, and preservation or appreciation of capital. Although the trustee must adequately diversify the
trust investments to spread the risk of loss, investing in one mutual fund may be sufficient if the fund is
sufficiently diversified.

Question 2

Distributions of assets received by a trustee

Answer 2

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. The traditional approach serves as the starting point for the modern approach. Under the UPAIA, a trustee is empowered to re-characterize items and reallocate investment returns as he deems necessary to fulfill the trust purposes, as long as his allocations are reasonable and are in keeping with the trust instrument. A distribution of stock is treated as a distribution of principal under the UPAIA.

Question 3

Class gift

Answer 3

A gift to a group of individuals with an automatic right of survivorship is a class gift. A class remains open and may admit new members until at least one class member is entitled to obtain possession of the gift or the preceding interest terminates.

Question 4

Vested Remainder

Answer 4

A vested remainder accelerates into possession as soon as the preceding estate ends for any reason, such as the disclaiming of the estate by its holder.

Question 5

Income Beneficiary of a trust disclaiming their interest

Answer 5

Almost all states have enacted statutes that permit beneficiaries of trusts to disclaim their interest in the trust property. When the holder of a future interest effectively disclaims that interest, the disclaimant is deemed to have predeceased the life tenant. If the income beneficiary of a trust disclaims her interest, then the trust principal becomes immediately distributable to the presumptive remainder beneficiaries of the trust, provided no one would be harmed by making a distribution to them earlier than it would have been made had the income beneficiary not disclaimed.

Question 6

Mandatory Trust

Answer 6

Subject to the trust instrument, it is the beneficiary’s right to receive income or principal from the 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.