Trusts July 2005 Flashcards
(5 cards)
Summary
A trust for “friends” is invalid because it does not have “definite beneficiaries.” Thus, First Bank should make no distribution to George. Carrie’s appointment of income to her son John is valid. Although Testator did not expressly state that appointments in further trust are permissible, the majority view is that, if the donee can appoint trust assets outright, the donee can also create lesser interests in permissible objects of the power. However, Charity is an impermissible object of Carrie’s special power; thus Carrie made anineffective appointment of the remainder. That interest will pass at John’s death to University, the taker in default of appointment designated by Testator.
A trust for “friends” is probably invalid for want of definite beneficiaries.
In order to create a valid trust, there must be intent, delivery, and acceptance. Additionally, there must be trust property, a trustee, and one or more beneficiaries. The Friends’ Trust has a trustee, First Bank, and property, $100,000. The question is whether there is a beneficiary.
A trust for indefinite beneficiaries is invalid. This rule derives from the principle that trust beneficiaries must be able to enforce the terms of the trust. See Restatement of Trusts (Third) § 46 (2003); George Gleason Bogert, Trusts§34 (6th ed. 1984). A trust for the benefit of “friends” is a trust with indefinite beneficiaries. See Restatement of Trusts (Third) §46, General Comment.
The Restatement of Trusts (Third) takes the position that a trust for friends may be valid if “some ascertainable group of friends . . . was intended . . . or . . . an implied term of the trust authorizes . . . [the trustee] to determine who the friends . . . are. . . .” Id. at Illustration 1. However, there are no facts to support such a finding in this case. The disposition cannot be saved by characterizing Friends’ Trust as a power of appointment because a power that must be exercised (a so-called “imperative power”), as here, also requires definite beneficiaries. See Clark v. Campbell, 133 A. 166 (N.H. 1926). A discretionary power, vesting in the trustee the power both to select beneficiaries and to determine distributions, is valid and would permit a trustee to distribute to friends. But here the instrument creating Friends’ Trust did not give First Bank discretion to select beneficiaries or determine distributions.
The donee of a special power of appointment exercisable in favor of the donee’s issue can exercise the power by appointing only a life estate to a permissible object of the power. Thus, the appointment to John is valid.
The language of Residuary Trust does not specify whether appointments in further trust (rather than outright) are permissible. In light of the language in Testator’s will, applicantscould argue that Carrie can appoint only principal to John. This argument, however, is rejected by the Restatement of Property and the weight of the modern case law, which take the position that, if a donee can appoint trust assets (principal) outright, then the donee can also create more limited interests unless the evidence shows that the donor intended otherwise. See Restatement of Property § 358(e) (1936); Restatement of Property (Second) §19.3 and accompanying comments (1986). Likewise, the Restatement permits donees to appoint property in trust for objects of the power. Therefore, the appointment of only a life estate to John is valid.
[NOTE: Local law may contain contrary authority.]
Carrie’s purported exercise of her power in favor of Charity is invalid because Charity is an impermissible object of the power.
The donee of a special power of appointment (a power that excludes the donee, the donee’s creditors, and the donee’s estate as permissible objects) can only exercise the special power in favor of objects designated by the donor of the power. Here, the objects of the power were limited by Testator, the donor of the power, to Carrie’s issue. Thus, Carrie’s attempted appointment to Charity is invalid. See Restatement of Property (Second) §§ 19.3, 20.1.
Because of Carrie’s partially ineffective exercise of the special power, the remainder of the new trust at John’s death will pass to University, the taker in default under Testator’s will.
Carrie exercised her special power of appointment by attempting to appoint to both permissible (John) and impermissible (Charity) objects. As a general rule, “the ineffectiveness of the appointments to the non-objects does not affect the appointments to the objects. . . .” Restatement of Property (Second) §20.1 cmt. g. Thus, the purported appointment to Charity does not invalidate the otherwise effective appointment to John in trust. (See Point Two(a).) Where a power has been ineffectively exercised, the property subject to the power not effectively exercised passes to the so-called “taker in default of appointment” designated by the donor of the power (here Testator). Testator’s will specifies that University is the taker in default of appointment and that University takes to the extent that its interest has not been divested by an exercise of Carrie’s special power. Here, University has been divested of the life estate effectively appointed to John but not the remainder interest ineffectively appointed to Charity. Thus, upon creation of the new trust John has a life estate and University has the remainder. Charity has no interest in this trust.
