Trusts - Model Rule Statements Flashcards
(6 cards)
restraints on marriage in a trust
A trust can be created for any purpose, as long as it is not illegal, restricted by rule of law or statute, or contrary to public policy. Trust provisions that restrain a first marriage have generally been held to violate public policy. However, a restraint on marriage might be upheld if the trustee’s motive was merely to provide support for a beneficiary while the beneficiary is single.
trustee’s duty of loyalty and self-dealing
A trustee is bound by a broad range of fiduciary duties, including a duty of loyalty. When a trustee personally engages in a transaction involving the trust property, a conflict of interest arises between the trustee’s duties to the beneficiaries and her own personal interest.
A trustee buying or selling trust assets is considered self-dealing, even if the transaction occurred at fair market value. When self-dealing is established, an irrebuttable presumption is created that the trustee breached the duty of loyalty. No further inquiry into the trustee’s reasonableness or good faith will be required, because self-dealing is a per se breach of the duty of loyalty.
When the duty of loyalty is breached, any beneficiary has standing against the trustee if his interests are violated, and he can choose either to set aside the transaction or to ratify the transaction and recover any profits therefrom.
UPA requirements for prudent investor
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.
allocation of assets received by a trustee
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.
class gifts
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.
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.
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.
trustee of a mandatory 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.
