Types of Trusts

Question 1

What is the rule on revocability of trusts?

Answer 1

All trusts are presumed irrevocable, UNLESS the trust explicitly authorizes revocation.

Question 2

What are the types of trusts AND trust-like alternatives?

Answer 2

1. Revocable lifetime (“Inter-vivos”) trusts;
2. “Pour-over” gifts;
3. Totten trusts;
4. Joint bank accounts;
5. Uniform Transfers to Minors Act (UTMA);
6. Charitable trusts
7. Non-trusts; AND
8. Statutory Spendthrift Rule

Question 3

What are the powers/roles that Settlor (or his estate) can take on in an inter-vivos trust?

Answer 3

1. Settlor can be a trustee;
2. Settlor can be an income beneficiary for life;
3. Settlor’s ESTATE can be one of the beneficiaries of the principal, PROVIDED THAT there is at least one other beneficiary; AND
4. Settlor can retain the power to terminate or amend the trust.

Question 4

What is disallowed w/r/t a Settlor in an I-V trust?

Answer 4

Settlor MAY NOT be the sole beneficiary IF he is also the sole trustee.

(i.e., There MUST be at least one beneficiary who is NOT the Settlor)

Question 5

What is the main requirement of an I-V trust?

Answer 5

There MUST be at least one beneficiary who is NOT the Settlor

Question 6

What are the three main reasons to have an I-V trust?

Answer 6

1. Manages assets efficiently;
2. Helps plan for future incapacity by avoiding a guardianship proceeding (i.e., you name your trustee yourself before things get bad); AND
3. Avoids probate (i.e., the process of proving a will/having it declared valid upon death of testator)

Question 7

What are two reasons NOT to set up an I-V trust?

Answer 7

1. Does not avoid taxes; AND
2. If the Settlor opts to keep an income interest or the power to revoke the trust, the full trust assets will be included in his gross estate for estate tax purposes.

Question 8

What is a pour over gift?

Answer 8

A testamentary gift (i.e., a gift made in a will) to an existing, revocable trust.

Question 9

Why create a pour over gift?

Answer 9

Gift avoids the will formalities in a trust; The trust can be changed during the lifetime of the Settlor, which is somewhat easier than changing a will.

Question 10

What is the key requirement to creating a PO gift?

Answer 10

The Trust must already be in existance OR be executed concurrently with the will.

Question 11

Must a POG be fully funded to be valid?

Answer 11

No. Pour over gift are valid even if the trust was unfunded OR only partially funded during the Settlor’s lifetime.

Question 12

Are POGs limited to trusts created by the Settlor?

Answer 12

No. A pour over gift can be applied to any existing trust, not just one created by the Settlor.

Question 13

What are the two wasys that LIFE INSURANCE PROCEEDS can be made payable to a trust?

(Can be viewed as a pour over gift)

(What are the other two types of proceeds that can be treated in the same way as life insurance proceeds?)

Answer 13

1. The insured can create an unfunded revocable insurance trust and name the trustee of the trust as policy beneficiary; OR
2. Have the trust be a testamentary trust and have the LI policy contract name “the trustee named in my will” as the policy beneficiary.

(N.B. Proceeds from savings accounts or pension plans can be handled the same way!)

Question 14

What is a Totten Trust? (a.k.a. A bank account trust)

*Commonly tested

Answer 14

(“Poor man’s trust”)

The Totten Trust is a bank account in the deopitor’s name “as a trustee for” a named beneficiary

(e.g., Jerry opens a bank account at Chemical Bank with the account name: “Jerry Seinfeld as Trustee for Elaine Benes,” where Elaine is the beneficiary of the “trust”)

Question 15

What are depositor’s and beneficiary’s rights and interests in a Totten Trust?

Answer 15

1. Depositor may make deposits and withdrawals as he wants during his lifetime;
2. Beneficiary has no interest in the account during the Depositor’s lifetime, but gets whatever is in the account upon Depositor’s death

Question 16

What words are required to create a TT?

Answer 16

None in particular! e.g., “ITF” is sufficient!

(e.g., Jerry creates an account at the bank “Jerry Seinfeld ITF Elaine Benes” – qualifies as a TT)

Question 17

What are four ways to revoke a TT?

Answer 17

1. Withdraw all the money in the account;
2. Depositor makes an express revocation during his lifetime (Writing naming the beneficiary and institution PLUS notarization and delivery to the bank);
3. Depositor makes a revocation in his will; AND
4. Death of the beneficiary.

Question 18

How can a Depositor revoke a TT account by express revocation?

Answer 18

Depositor can revoke a TT account by express recocation via a writing:

1. naming the beneficiary and institution;
2. that is notarized; AND
3. delivered to the bank.

(N.B. ANY missing element makes the entire revocation INVALID)

Question 19

What happens if the beneficiary of a TT dies before taking?

Answer 19

If beneficiary dies,

1. TT is revoked; and
2. the money in the account goes to the Depositor free and clear

Question 20

How can a cahnge of beneficiary be made w/r/t a TT account?

Answer 20

(Same way as if revocation!)

Depositor must:

1. Name the old beneficiary AND the new one;
2. Get the statement notarized; AND
3. Deliver to the financial institution

Question 21

What ability do creditors of the depositor have to access the TT account?

Answer 21

Creditors of teh Depositor can always reach the TT account balance, before OR after the Depositor’s death

Question 22

What is a joint bank account in the context of trusts?

Answer 22

(A trust-like alternative)

A bank account jointly held with right of survivorship

(e.g., “Sam and Diane with Right of of Survivorship”)

Question 23

What is the most popular issue w/r/t joint bank account “trusts”?

How is it determined?

Answer 23

Whether anyone can block the money from going to the surviving account holder when one of the parties dies.

Survivorship language can be set aside IF:

1. Clear and convincing evidence [shows]
2. Survivorship was not intended when the account was established, AND
3. The account was opened only as a matter of convenience to the Depositor

Question 24

How much of a joint account does each joint account holder own?

Answer 24

1/2 of the account, no matter who deposits what

(If one person makes the entire deposit, it is considered a GIFT of 1/2 to the other account holder!)

(e.g., Diane opens an account in the name of her and Sam, payable to “either or the suvivor of them.” Diane made a deposit of $100k. During the lifetime of Sam and Diane, Diane owns $50k and Sam owns the same amount as a gift from Diane)

Question 25

What is the Uniform Transfers to Minors Act?

Answer 25

(A trust-like alternative) UTMA allows for money transfers to minors with tax benefits and certain restrictions on when the minor can access the money (This does not create a trust; it is a special statutory CONSERVATORSHIP, where minor holds the property but the Custodian administers it)

Question 26

What are three reasons to use the UTMA to make a gift to a minor?

Answer 26

1. It acoids guardianship proceedings; 2. It avoids the administrative troubles of a trust; AND 3. It qualifies for a $14k/donee federal and state gift tax exclusion

Question 27

What must be specified in a UTMA gift?

Answer 27

1. Gift must be made to a "custodian," NOT a Trustee; AND 2. Gift must specify that it is being made via UTMA (N.B. UTMA gift MAY be made in a will, provided it uses the same statutory language)

Question 28

What are the three duties of a custodian of a UTMA gift?

Answer 28

The UTMA Custodian must: 1. Hold, manage, or invest the property as a REASONABLY PRUDENT PERSON; 2. Pay over to the minor or provide for the minor's needs whatever part of the property he (Custodian) deems "adviseable"; AND 3. Pay what is left of the property to the minor upon his reaching age 21

Question 29

What are teh UTMA tax consequences for a Custodian?

Answer 29

IF donor is Custodian: Amount of the gift IS includable in the Custodian's gross estate; IF donor names someone else Custodian: Amount of the gift is NOT includable in C's gross estate.

Question 30

What are the five key things for a charitable trust?

Answer 30

Charitable trusts: 1. MUST have indefinite beneficiaries, who must be a reasonably large group (e.g., "all orphans in Manhattan" AND NOT "all my children") (but see Masses exception!); 2. MUST be for a charitable purpose (e.g., health, education, religion, etc.); 3. MAY be perpetual (i.e., are NOT subject to the RAP); 4. Can be changed via the cy pres doctrine (i.e., if stated purpose is no longer accomplishable, Court may change the trust to be as near to Settlor's intent as possible); AND 5. Beneficiaries are represented by the State AG (he is an indispensible party in any suit on construction or enforcement of a charitable trust, and also has STANDING to sue to enforce trust's terms!)

Question 31

What is the Masses exception in a charitable trust?

Answer 31

Although charitable trusts must generally have indefinite beneficiaries, who are a relatively large group, a trust for masses of relatives is okay! (e.g., Trust "to pay for the costs of masses for the repose of the souls of the testator and his relatives" is OK)

Question 32

What are non-trusts? What are the three types?

Answer 32

Non-trusts are called trusts, but they're not actually trusts. There are three flavors: 1. Honorary trusts (a non-charitable trust where no human is the beneficiary); 2. Constructive trusts (Equitable remedy); AND 3. Resulting trusts (Equitable remedy)

Question 33

What is an honorary trust?

Answer 33

(Actually a non-trust) A private (i.e., non-charity) trust where the beneficiary is not a person -- NOT a trust. (A private trust MUST have a human beneficiary) (BUT see exceptions!)

Question 34

What are the two exceptions to the general rule that an honorary trust is not a trust?

Answer 34

1. Pet trusts (You can put money in a trust for a pet, but it may not last for longer than the pet's lifetime -- administered by someone named in the will OR designated by the court) 2. Cemetary trusts (Trusts for care and maintenance of cemetaries and burial plots are considered charitable)

Question 35

What is the purpose of a constructive trust? What is the Trustee's job?

Answer 35

Constructive trust is an equitable remedy designed to disgorge unjust enrichment resulting from wrongful conduct. Trustee's job is to convey the property to the person who SHOULD have the property in equity.

Question 36

What is a Purchase Money Resulting Trust? (Resulting trust) (MBE rule?) (NY rule?)

Answer 36

PMRT arises when: 1. Purcahser buys property and has title put in someone else's name (who is NOT a relative); AND 2. Later, Purchaser says no gift was intended and asks the holder for title, but holder refuses On MBE: Situation creates a PMRT, allowing the P to compel H to return title. NY: NO PMRT!

Question 37

What is the exception to the general rule that NY doesn't recognize Purchase Money Resulting Trusts?

Answer 37

There is an exception to NY's no-PMRT rule WHEN: 1. Clear and convincing evidence that 2. Grantee had expressly OR impliedly promised to reconvey the land to the purchaser. In this case, constructive trust can be imposed to benefit P.

Question 38

What is the Spendthrift Rule?

Answer 38

Protects a trust beneficiary's interest from creditors by PROHIBITING voluntary or involuntary transfer of beneficiary's interest to another. (i.e., Protects a beneficiary from assigning away his or her inheritance and it also protects against a creditor attaching the beneficiary's inheritance.)

Question 39

NY QUESTION What is the NY special statutory rule w/r/t spendthrift clauses in trusts? What is the family exception?

Answer 39

NY special rule protects ALL INCOME INTERESTS in trusts with spendthrift protections EVEN IF the trust does not contain a spendthrift clause. --\> Automatic statutory spendtrift rule has an EXCEPTION: Beneficiary MAY shift annual income to his spouse, grandparents, or "issue of grandparents" IF annual income exceeds $10k) (N.B. Protection only applies to income from the trust, not to the principal!)

Question 40

What is typical language setting out a spendthrift clause?

Answer 40

"No beneficiary of this trust shall have the power to assign his interest, nor shall such interest be reachable by the beneficiary's creditor's by attachment or other legal process."

Question 41

What are five major exceptions to spendthrift clauses?

Answer 41

1. Creditors who furnish necessities 2. Child support and alimoney 3. Federal tax liens 4. Excess income beyond what is needed for support and education (last resort remedy) 5. 10% levy established by NY statute (N.B. All creditors TOGETHER share the 10%; it's not 10% per)

Question 42

What is a major limitation on a spendthrift clause? (i.e., What are the three limitations of the Self-Settled Trust Rule)

Answer 42

1. Spendthrift protection does NOT apply to any interest retained by the Settlor. 2. Settlors cannot hide from their own creditors, but can protect other beneficiaries. 3. All revocable trusts are fair game for Settlor's creditors.