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Flashcards in Trusts Beneficiaries Deck (22)
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1

Why do we need Beneficiaries?

Must be someone to whom TT owes fiduciary duties & someone who can call TT to account

2

Beneficiaries in Charitable trusts?

Recall; just needs to be for public benefit.

3

Creditor's Rights with Trusts

--->Discretionary Trust – beneficiary (B) can’t alienate his beneficial interest; B’s creditors can’t attach and can’t compel TT to make a distribution
--->Spendthrift Trust – Beneficiary can’t transfer his interest; creditors can’t attach even if mandatory distribution right
--->Self-Settled Asset Protection Trust – creditors of settlor may have recourse against such Trust’s assets

4

Limits on Settlor's Freedom of disposition

1) restraints on alienation and creditor's rights
2). Power to modify or revoke trust
3). Power to Remove TT

5

Mandatory Trust

Trustee must make payments to beneficiaries

6

Discretionary Trusts

TT has discretion over payment of either Trust’s income or principal, or both.

7

Trustee's discretion in discretionary trusts

-->Discretion – TT may be given wide discretion or may be limited by an ascertainable support standard (“such amounts as are necessary to support my children in the lifestyle to which they are accustomed”)
-->Under the UTC §814 – TT shall exercise discretionary power in good faith and in accordance with terms & purposes of Trust and interests of beneficiaries

8

Types of Discretionary Trusts

Pure discretionary
Support
Discretionary Support (tricky tricky)

9

Pure Discretionary Trust

TT has absolute discretion over distributions to Bs
-->Cutting-off-distributions (Hamilton) – some states permit that creditors can get a court order to make TT stop making payments to B until creed. has been paid.

10

Support Trust

TT required to make distributions as necessary for beneficiary’s needs

11

Discretionary Support Trust

combines absolute discretion with a distribution standard
--> Courts tend to treat them as pure discretionary Trusts

12

Distinction b/w discretionary support trust

both Rest. 3d Trusts & UTC reject any distinction because B can always obtain some form of judicial review of TT’s exercise of discretion
--> Rest. 3d Trusts – allows B’s creditor to stand in B’s
shoes and compel/attach a distribution;
--> UTC §504 – creditor of B may not compel a distribution that is subject to TT’s discretion
□ Exception – support of B’s child, spouse (or former)

13

Spendthrift trust... WTF is this

Trust provision that prohibits voluntary or involuntary alienation of beneficial interests.... oh i see... so creditors can't get interest in trust nor can't use your trust interest as collateral for a loan... (thats why the UCC never mentions them in secured transactions holla!)

○ Most States – must expressly include clause in Trust
○ UTC §502 – spendthrift valid if restrains both voluntary & involuntary transfer of a B’s interest
-->○ UTC §503(b) – exception for support of B’s child, spouse or former spouse... Child support can get at your trust.
○ UTC & Rest 3d. both reject exception for tort creditors
○ Scheffel – upheld spendthrift clause against tort claim .

14

All exceptions to spendthrift clause

so generally creditors can't reach trust under spendthrift unless (probe don't need to know):
○ Alimony & child support creditors (majority rule)
○ Tort creditors (not entirely settled; UTC & Rest. 3d – No!)
○ Creditors furnishing necessary services or support
○ Federal tax liens
○ Spendthrift caps (for ordinary creditors)
○ Excess over amount needed for support (station-in-life rule)
○ Bankruptcy
○ Pension Trusts (ERISA, with exceptions)
○ TT’s exercise of discretion under discretionary Trust

15

Self-Settled Trusts

Settlor creates and transfers assets into a self-settled trust.
--> creditors always have recourse against settlor-beneficiary’s entire interest, even if Trust is discretionary, spendthrift, or both.

16

Self-settled asset protection trusts

14 states allow. If settle into irrevocable trust – can’t be fraudulent (i.e., not created w/ intent to defraud creditors)
○ Exceptions – alimony & child support; divorce debts; personal/property injury claims before Trust created

17

Modifying trust if settlor is alive under C/L

settlor and all beneficiaries must consent to modify or terminate an irrevocable Trust, even if Trust contains a spendthrift clause

18

Modification w/o Settler consent

○ By consent of all the beneficiaries and modification or termination is not contrary to a material purpose of settlor (Claflin doctrine); OR
○ Changed circumstances not anticipated by settlor that would defeat or substantially impair accomplishment of purposes of the Trust (equitable deviation doctrine)

19

Typically, material purpose is implied for type of trust and can't be terminated under:

○ Spendthrift Trust
○ Beneficiary to need receive corpus until specified age
○ Discretionary Trust
○ Trust for support of beneficiary
• Estate of Brown – because settlor intended for beneficiaries to have a life-long income, this material purpose would be defeated by termination of Trust. Even if beneficiaries consent, the trust cannot be terminated if the materials purpose can stand. Testator intended life-long trust for his wife.

20

Relaxed and groovy standards under UPC

○ General rule – UTC §411(b) § Unanimous consent and
○ Spendthrift Trusts & material purpose (UTC §411(c)) § Spendthrift clauses are so common, we need not over emphasize their importance with respects to modifications. --> these are not automatically material purpose.
○ Unanimity of beneficiaries (UTC §411(e))
○ Viability of material purpose standard (Rest. 3d §65)

21

Deviation and changed circumstances

UTC §412 (2000): Court may modify administrative or dispositive provisions of Trust because of unanticipated circumstances if modification will further Trust’s purposes.
○ Consent of all beneficiaries not required
○ Typically administrative, not dispositive provisions
○ Issue – advantageous to Trust beneficiaries
○ Reformation (UTC §415) vs. deviation (UTC §416)
BUT fiduciary Duties of trustee not modified.. Riddel case

22

Trustee Removal

• Removal is a remedy for breach of trust, not modification of the Trust terms
• General rule: Court can remove for cause – TT who is dishonest, engaged in serious breach of Trust, or shown unfitness; court may not remove for breach that is not serious or for simple disagreement with beneficiary
--->Dont inherit breach problems form prior trustee but if you're aware of problems you need to rectify it.