Trusts February 2007 Flashcards
(4 cards)
Summary
The trust’s income should be paid to Donna, the residuary legatee under Testator’s will, because the gift of the income fails for want of definite beneficiaries. As to the principal, nothing should be paid to Claimant before the trust terminates because Claimant’s rights cannot exceed those of Sam, the trust beneficiary, and Sam only has a right to receive trust principal after 10 years. When the trust terminates, one half of the corpus should pass to Sam and the other half, in all likelihood, to State Polytech, as a result of the probate court’s exercise of its cy pres power.
Trustee should pay the trust income to Donna, the residuary taker, because the gift of income to Testator’s friends fails for want of definite beneficiaries.
It is a well-established trust law principle that a private express trust must have definite beneficiaries. See UNIF.TRUST CODE(UTC) § 402(a)(3). The term “friends” is indefinite because it is impossible to determine the precise number of persons who fit this description. Clark v. Campbell, 133 A. 166 (N.H. 1926) (a leading case invalidating a trust where the trustee had the discretion to select among friends). Although the modern trend would allow a trustee to select a beneficiary from an indefinite class (see UTC § 402(c)), this liberalized position does not apply if the trustee must distribute equally to all members of an indefinite class. See WILLIAM M. MCGOVERN JR.&SHELDON F.KURTZ, WILLS,TRUSTS,AND ESTATES at 377-79 (3d ed. 2004). Here the trust instrument requires Trustee to distribute income equally among all of Testator’s friends. Thus, the income portion of the trust fails for want of definite beneficiaries. The fact that Walter and Janice may have been friends of Testator’s does not entitle them to any distribution because the income must be distributed equally among all of Testator’s friends.
Where an attempt to create a trust fails, the trustee holds a resulting trust for the settlor or the settlor’s successors in interest. See RESTATEMENT (THIRD)OFTRUSTS § 8. Where a testamentary trust, as here, fails, the residuary legatee succeeds to the property interest. See id. Donna, the residuary legatee under Testator’s will, would be Testator’s successor-in-interest of the resulting trust. Accordingly, Trustee should pay over trust income to Donna during the trust term.
It could be argued that the income for the first ten years either should be accumulated for ultimate distribution to the remainder beneficiaries or, alternatively, should be distributed to the presumptive remainder beneficiaries currently. An applicant could reasonably argue in favor of accumulating trust income for ultimate distribution to the remainder beneficiaries when the trust terminates. However, because the trust prohibited a distribution to Sam and State University earlier than 10 years after Testator’s death, the trust should not terminate under the acceleration of remainder doctrine. This fact makes the alternative of current income distribution to the remainder beneficiaries less likely.
Trustee should not immediately pay over $25,000 to Claimant because, as a creditor of a trust beneficiary, Claimant’s rights cannot exceed those of Sam, the beneficiary, and Sam has only a right to half of the principal in 10 years.
A creditor may reach a beneficiary’s interest in a trust if the trust does not contain a spendthrift provision. See UTC § 501. But a beneficiary’s creditor can have no greater rights in trust assets than the beneficiary, and a beneficiary of trust principal is not entitled to trust principal until the termination of all preceding estates. See RESTATEMENT OF PROPERTY § 156 (remainder as future right to property);RESTATEMENT (THIRD)OFTRUSTS § 2, cmt. d (trust beneficiaries have equitable estates). Thus, Claimant would not be entitled to any trust principal until the trust terminates. Indeed, if the trust principal were reachable during the 10-year period, then the rights of any income beneficiaries would be adversely affected because their rights are based on income derived from the entire principal.
Therefore, Claimant is not entitled to receive $25,000 of trust principal. Claimant can only reach what Sam had—a right to receive trust principal after 10 years. Of course, Claimant would be entitled to a $25,000 distribution from Trustee when the trust terminates, assuming that the judgment against Sam is still outstanding and that his interest in the trust at that time is at least $25,000.
At the end of the 10-year period, one-half of the trust principal should be distributed to Sam. The other half should be distributed, in all likelihood, to State Polytech in lieu of State University by application of the court’s cy pres power.
The trust provides that, at the end of ten years, the trust principal shall be distributed equally to Sam and State University. Sam is entitled to half the principal at that time, subject to a possible $25,000 reduction to pay Claimant. (See Point Two.)
The other half of the principal is payable to State University, but this gift cannot be paid because State University no longer exists. However, State University is a charity. It is a well-established principle of trust law that, when a charitable purpose cannot be carried out, the court should determine whether to exercise its cy pres power and redirect the charitable gift to another like charity. See UTC § 413;RESTATEMENT (THIRD)OFTRUSTS § 67.
The cy pres doctrine requires an initial inquiry into the settlor’s intent: if the court determines that the settlor had a specific charitable intention limited to the stated charitable purpose, the gift goes to the residuary legatee, in this case Donna. However, if the court determines that the settlor had a general charitable intention, it should substitute for the named charity another charity that is consistent with the settlor’s intentions. Id. Both the UTC and Restatement (Third) of Trusts presume that a settlor has a general charitable intent. Id.
Given the presumption of general charitable intent, there is a strong argument that the court should exercise its cy pres power and substitute the fine arts program at State Polytech for that at State University. The will evidences a desire to benefit a fine arts program. It evidences no intention of limiting that benefit to the program at State University. Testator could not have known that State University would cease to exist after his death. The state legislature has already determined that State University’s fine arts program largely duplicates that at State Polytech. Substituting State Polytech for State University would maintain Testator’s commitment to the fine arts and public education in his state of residence. Cf. RESTATEMENT (THIRD)OF TRUSTS § 67 cmt. e (providing that, if the testator leaves money to a particular university to teach courses in dianetics, and the university refuses to accept the funds on that basis, the court may permit the legacy to be applied to the establishment of such a course in another university, assuming the settlor has not provided otherwise).
If the court does not apply the cy pres doctrine, the gift to charity fails and the share State University was intended to receive either passes wholly to Sam as the only remainder beneficiary or wholly to Donna, the residuary legatee under Testator’s will.
