Allocating Trust Property, Income & Expenses Flashcards
Life tenant/Remainder Beneficiaries
Life tenant/Remainder beneficiaries gets: income from the trust such as cash divided, interest, rent income, and net business income. Remainder beneficiaries are entitled to the trust principal when the trust terminates.
They need to pay for expenses such as minor repairs, taxes, and loan interest.
Income & Principal
All assets received by a trustee must be allocated to either income or principal. The allocation must be balanced 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.
Under the UPAIA (modern approach), 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.
Power of Appointment
A power of appointment enables the holder to direct a trustee to distribute some or all of the trust property without regard to the provisions of the trust. A special power of appointment allows the donor to specify certain individuals as the objects of the power, to the exclusion of others.
When an appointment exceeds the grant of power, the property or interest that was invalidly appointed passes to the taker in default - the party who would have received the interest had there been no appointment.
Omitted Child
If a decedent fails to provide for a child born or adopted after the execution of the trust, the omitted child receives a share equal to that which the child would have received if the decedent had died intestate.
In California, this protection extends to children who the settlor believed to be deceased or the birth of whom the settlor was unaware. The omitted child statute does not apply if: (i) it appears that the omission of the child was intentional; (ii) the settlor had other children at the time the testamentary device was executed and left substantially all of his estate to the other parent of the omitted child; or (iii) the settlor provided for the child outside of the testamentary device and intended this to be in lieu of a provision in the testamentary device.
Omitted Spouse
An omitted spouse is one who was left out of a will or trust and was married to the settlor after the execution of it. In such cases, the spouse is entitled to an intestate share of the settlor’s estate, unless:
(i) the omission of the spouse was intentional, and that intent is apparent in the trust;
(ii) the spouse was given property outside if the trust in lieu of a disposition in the settlor’s trust; or
(iii) the spouse is party to a valid agreement waiving the right to share in the estate.
