CALIFORNIA TRUSTS

Question 1

What is a private express trust?

Answer 1

A fiduciary relationship with respect to property whreby one person, the trustee, holds legal title for the benefit of another, the beneficiary, and which arises out of a manifestation of intent to create it for a legal purpose.

Question 2

What property can be the corpus of a trust?

Answer 2

Any presently existing interest in property that cdan be transferred can be the corpus of a trust.

E.g.:

1. fee simple
2. a future interest, such as a contingent remainder
3. a life insurance policy
4. bonds
5. stocks

NOT Illusory interests. Eg.:

1. future profits to a business
2. a debt that settlor owes beneficiary is not property and cannot be the corpous of a trust; debt is a liability, not property
3. a mere expectancy; what settlor expects to inherit or receive as a gift. Not property.

Question 3

Who can be the beneficiary of a private express trust?

Answer 3

Any ascertainable person or group of peope can be the beneficiary of a private express trust. Person includes a legal person.

E.g. :
1. Corporations
2. Unincorporated associations
•At common law, could not be. Modern law says ok.

3. class gifts are valid, but watch out for a class gift that is too big. (Everyone in CA, e.g.= too big. look for charitable trust)
4. A child conceived when the interest was created and later born is deemed an ascertainable person.
5. Watch out for RAP violaiton:
   E.g : O conveys to Bank and Trust to A but if liquor is ever sold, then to B.
   B’s interest can vest 10,000 years from now, which is certainly more than any life in being plus 21 years. B’s interest is stricken.

Question 4

Must a trust have a trustee?

Answer 4

Yes, but the court will not allow a trust to fail solely because there is no trustee or a trustee refuses to serve. In such a case, the court wil appoint a trustee. Until a trustee is appointed, the settlor or the settlor’s estate will hold legal title.

Question 5

What level of intent is required to form a trust?

Answer 5

There must be a present manifestation of trust intent made by the settlor. You cannot manifest an intent for a trust to arise in the future.

Question 6

There must be a _____________intent made by the settlor to form a trust.

Answer 6

present manifestation of trust

Question 7

Are magic words required to create a trust?

Answer 7

No. Settlor does not have to use the words trust, trustee or beneficiary. However, precatory words, by themselves are not sufficient to create a trust.

Precatory words= words of wish, hope, desire

Question 8

S gives $100,000 to his brother, with “the direction and order that he use it for my sister.”

v.

S gives $100,000 to his brother, “with the hope and desire that he will use it for my sister.

v.

S gives $100,000 to his brother, “with the hope and desire that he will use it for my sister AND S was supporting his sister before transferring money to the brother, but stopped supporting his sister after the money was transferred.

Trust?

Answer 8

1. Yes. The words are mandatory, not precatory
2. No. The words are precatory.
3. Precatory words + parol evidence MAY form a trust.

Question 9

If you conclude that the words are precatory and the parol evidence is not sufficient to cause a trust to be created, then the transferee wons the property in _____________.

Answer 9

fee simple

Question 10

Do trusts of personal property have to be in writing?

Answer 10

No. Statute of frauds only applies to real property.

Question 11

How do you create a private express trust that will take effect at settlor’s death?

Answer 11

1. Comply with the Statute of Wills (the local probate code). Settlor is really a testator. Thus, part of the T’s will has a privision for a testamentary trust, a trust which will take effect at T’s death.

E.g., will states “I devise Blackacre to Bank to hold in trust for the benefit of my son for his life.”

Question 12

How do you create a trust to take effect during his lifetime?

Answer 12

2 Ways:

1. Transfer in Trust: In a transfer in trust, a 3rd person is the trustee:
   • For a trust of REAL PROPERTY, the settlor must execute and deliver a deed transferring title to the trustee. SOF requires writing.
   • For a trust of PERSONAL PROPERTY , there must be delivery to the trustee of the trust property at the time settlor manifests the intent to create the trust. The delivery can be actual, symbolic, or constructive.
   * If there is no delivery to trustee, there is no trust. Moreover, a promise to deliver the corpus in the future is not a delivery.
2. Declaration in Trust: Settlor herself is the trustee.
   •For REAL PROPERTY, there must be some writing satisfying the SOF indicating that settlor also is the trustee.
   • PERSONAL PROPERTY: because the settlor is the trustee, there is no issue of delivery. Look to the present manifestation of trust intent.
   *E.g. Settlor executes a trust instrument that states “I declare myself as trustee for this $100,000 for the benefit of Abel during Abel’s lifetime.

Question 13

What is a declaration in trust?

Answer 13

Declaration in Trust: Settlor herself is the trustee.

To create:
•For REAL PROPERTY, there must be some writing satisfying the SOF indicating that settlor also is the trustee.
• PERSONAL PROPERTY: because the settlor is the trustee, there is no issue of delivery. Look to the present manifestation of trust intent.
*E.g. Settlor executes a trust instrument that states “I declare myself as trustee for this $100,000 for the benefit of Abel during Abel’s lifetime.

Question 14

What is a transfer in trust?

Answer 14

Transfer in Trust: In a transfer in trust, a 3rd person is the trustee:

To create:
• For a trust of REAL PROPERTY, the settlor must execute and deliver a deed transferring title to the trustee. SOF requires writing.
• For a trust of PERSONAL PROPERTY , there must be delivery to the trustee of the trust property at the time settlor manifests the intent to create the trust. The delivery can be actual, symbolic, or constructive.
* If there is no delivery to trustee, there is no trust. Moreover, a promise to deliver the corpus in the future is not a delivery.

Question 15

T/F: A trust can be created for any legal purpose?

Answer 15

True

Question 16

What happens if a trust is for an illegal purpose or, if not illegal, violative of public policy?

Answer 16

1. Distinguish between illegality at creation and subsequent illegality.

If illegality at creation:
1. Try to excise the bad from the good. If you can, the trust will stand.
E.g.: Settlor creates a trust for Abel on the condition that Abel divorce his spouse.
• Trust is violative of public policy. Excise the bad results in a trust where Abel takes free of the condition.

2. If you can’t excise the illicit condition, the court has 2 options and will do whatever acheives the best result:
   1. Option 1: Invalidate the trust at its inception. Settlor remains owner, trust is not recognized.
   E.g.: Settlor creates a trust to defraud settlor’s creditors.
   • Court will invalidate the trust so that settlor’s creditors can attach the assets.

 2.    Option 2:  Allow the trustee to keep the property for himself or herself.  As punishment to the settlor who does not come w/ clean hands. 

If illegality subsequent to creation:
The trust becomes a resulting trust in favor of the settlor if settlor is alive, and if not, to the settlor’s estate.

Resulting trust= an imiplied in fact trust based on the presumed intent of the parties.

Question 17

What are the elements of a private express trust?

Answer 17

1. fiduciary relationship
2. with respect to property, whereby
3. one person, the trustee
4. holds legal title for the benefit of another,
5. the beneficiary, and which
6. is arises out of a manifestation of intent
7. to create it for a
8. legal purpose

Question 18

What is a charitable trust?

Answer 18

1. Statute of Elizabeth: trusts for eduction, alleviation of poverty, alleviation of sickness, to help orphans.
2. Restatement: Any trust which confers a substantial benefit upon society.

E.g.:  Trusts to:
help the poor
advance education
help the sick
promote religion

Question 19

How do you create a charitable trust?

Answer 19

Created in the same way a private express trust is created. You need a:
1. manifestation of trust intent, which can be done
• at T’s death by will or during settlor’s lifetime by a declaration of trust or by transfer in trust a

2. presently existing interest in property that can be transferred
3. for a legal purpose

Question 20

Who is the beneficiary of a charitable trust?

Answer 20

Society. No ascertainable person or group of peopel who are the beneficiaries.

*While an individual may recieve an incidental benefit, the focus is on society.
E.g.: a trust is established to endow a chair at a university. While a professor may receive a benefit, society really benefits when education is advanced.

Question 21

When the beneficiary is a small group of people, is it a charitable trust or private express trust? (E.g. settlor creates a trust to alleviate poverty among his poor relatives).

Answer 21

Split of authority:

1. Private express trust because only a few people are getting a benefit.
2. Charitable trust because whenever poverty is established, society benefits.

Question 22

Why does the categorization of a trust as either private express or charitable trust matter?

Answer 22

Cy Pres and Rule Against Perpetuities

Question 23

T/F: The rule against perpetuities applies to charitable trusts.

Answer 23

False. It does not.

Question 24

Settlor creates a charitable trust to build and maintain a free hospital for the poor, but there is not enough money in the trust to do this. What happens?

Answer 24

One of 2 solutions:
1. Resulting trust: corpus is returned to settlor if alive, and if not, to settlor’s estate (residuary, then intestate)

2. Cy Pres: court will modify the mechanism cy pres, as nearly as possible, to effectuate S’s general charitable intent. (not specific)

E.g court can change from hospital to free clinic if we stipulate that there is enough money for clinic.

Question 25

How do we know if settlor’s charitable intent was general (so that cy pres may be used) or specific (so that trust fails and resulting trust)?

Answer 25

1. Introduce both intrinsic evidence (the trust instrument) and extrinsic evidence to ascertain settlor’s intent.

Question 26

Settlor creates a charitable trust for Syracuse University Medical School. Valid charitable trust. Years later, after settlor’s death, the medical school ceases to exist. Syracuse wants to use the trust for their health science school. Can they under cy pres?

Also, Settlor graduated from Syracuse Medical School, taught there, was dean there and gave money during his lifetime to Medical school but seldom gave to any other charity during his lifetime.

Answer 26

Only if the settlor had a general charitable intent.

Here, settlor has a specific charitable intent.

Question 27

T/F: a trustee may invoke cy pres.

Answer 27

False. Trustee may petition the court, but only the court has the cy pres power.

Question 28

What is an honorary trust?

Answer 28

A trust which has no ascertainable beneficiary and confers no substantial benefit upon society.

Cant’ be a private express trust or a charitable trust.

Simply a goal of the settlor. The trustee is not required to carry out settlor’s goal, but has the power to carry it out.

Trustee is on his honor only to carry out settlor’s intent.

E.g.:

1. A trust to further fox hunting
2. A trust to take care of settlor’s pet
3. A trust to advance an unusual political ideology.

Question 29

What are some major problems with honorary trusts?

Answer 29

1. Trustee may refuse to carry out settlor’s wishes, and then trust fails and there is a resulting trust in favor of the settlor, or if she is dead, to settlor’s estate.
   • This never happens with private express trust because if trustee refuses to carry out purpose, the court will replace with another trustee.
2. Commonly there are RAP problems. Some courts strike it at its inception, others allow trust to exist for 21 years then form resulting trust.

Question 30

What is a totten trust?

Answer 30

A totten trust is also referred to as tentative bank acocunt trust, whereby the named beneficiary takes whatever is left in the account at death of the owner of teh account.

*Really a misnomer–not a true trust. No fiduciary duty. REally just a will substitute. Better to call totten account.

E.g.: Totten account reads: “Mary Smith as trustee for John Jones.”
•Mary is the settlor/depositor
• Mary has full control during her lifetime
• Mary does not owe John any fiduciary duties
• Mary can do anything w/ the money she wants
• John takes whatever is elft, if anyting, on Mary’s death.

Question 31

Issue on the exam: Does the settlor/trustee in a Totten account do something during her lifetime to elevate the lowly Totten account with no fiduciary duties to a full-blown private express trust with the full range of fiduciary duties?

Answer 31

1. Look to the actions of the depositor/trustee for a manifestation of trust intent.

E.g. If Mary tells John that “I have created this trust for you,” or words to that effect, Mary has manifested an intent to create a full-blown private express trust, with the full range of fiduciary duties.

Question 32

T/F: The beneficiary of a private express trust can voluntarily alienate his interest in property (transfer his right to future payments), and creditors can involuntarily alienate a B’s interest in property (attach or seize a beneficiary’s right to future payments).

Answer 32

True, unless trust has a spendthrift, support, or discretionary provision.

Question 33

What is a spendthrift trust (spendthrift provision of a private express trust)?

Answer 33

The beneficiary cannot transfer his right to future payments of income or principal and creditors cannot attached the beneficiary’s right to futuer payments of income or principal.

Terms of the trust must essentially include: “No beneficiary of this trust shall be allowed to voluntarily transer his right to future payments, and no creditor shall be allowed to attach any beneficiary’s right to future payment.

Question 34

Can the beneficiary ever voluntarily alienate or transfer his right to future payments, notwithstainding a spendthrift provision?

Answer 34

No, generally. But sometimes a court will recognize the assignment on the ground that the beneficiary merely has given the trustee a direction or oder to pay the beneficiary’s agent or represerntative–the assignee. In such case, prior to the time of paymnet, beneficiary would have the righ tto revoke the order of direction.

Question 35

Can creditors ever attach the beneficiary’s right to future payments, notwithstanding the spendthrift provisions?

Answer 35

No, as a general rule.

Common law exception: preferred creditors can attach the beneficiary’s right to future payments notwithstanding the spendtrhift privison. Not typical creditors. Common law preferred creditors, e.g.:
• goverment creditors, such as the IRS
• those who provide the necessities of life to the beneficiary
• a child for child support
• a spouse for spousal support
• an ex=spouse for alimony
• a tort judgment creditor.

In many jurisdictions, any creditor has the right to attach surplus as measured by the beneficiary’s station in life.
E.g.: Suppose B needs $25,000 a year to live, to maintain her staiton in life (subjective not objective), that is, her standard of living. Suppose also that the trust generates $75,000 of income for the B. The $50,000 is surplus and can be attached by any creditor, not just a common law preferred creditor.

Question 36

Can a settlor ever create a spendthrift trust for himself (a self-settled spendthrift trust)?

Answer 36

As to involuntary alienation: the majority of jxs the provisions are not recognized. Insulating yourself from your creditors violates public policy. A few jxs allow it.

As to voluntary alienation: Split: Most jxs will ignore the provision and allow settlor to voluntarily alienate. Some will not allow settlor to transfer under the policy rationale that enforcement of the spendthrift provision protects the beneficiary from him/herself.

Question 37

What is a support trust (support provision of a private express trust)?

Answer 37

A trustee is required to use only so much of the income or principal as is necessary for the beneficiary’s health, support, maintenance, or education.

Terms of the trust must include the definition: E.g.: “Trustee is required to use only so much of the income or principal as is necessary for the beneficiary’s health, support, maintenance, and education.”

Question 38

Can the beneficiary of a support trust ever voluntarily alienate or transfer his right to future payments?

Answer 38

Nope. That would defeat the purpose.

Question 39

Can creditors every attach the beneficiary’s right to future payments, notwithstanding the support trust provisions?

Answer 39

Rules are the same as for spendthrift. Generally no, but preferred creditors can attach the B’s right to future payments.

Common law exception: preferred creditors can attach the beneficiary’s right to future payments notwithstanding the support privison. Not typical creditors. Common law preferred creditors, e.g.:
• goverment creditors, such as the IRS
• those who provide the necessities of life to the beneficiary
• a child for child support
• a spouse for spousal support
• an ex=spouse for alimony
• a tort judgment creditor.

In many jurisdictions, any creditor has the right to attach surplus as measured by the beneficiary’s station in life.
E.g.: Suppose B needs $25,000 a year to live, to maintain her staiton in life (subjective not objective), that is, her standard of living. Suppose also that the trust generates $75,000 of income for the B. The $50,000 is surplus and can be attached by any creditor, not just a common law preferred creditor.

Question 40

Can a settlor ever create a support trust for himself or herself?

Answer 40

Same as spendthrift trust.

As to involuntary alienation: the majority of jxs the provisions are not recognized. Insulating yourself from your creditors violates public policy. A few jxs allow it.

As to voluntary alienation: Split: Most jxs will ignore the provision and allow settlor to voluntarily alienate. Some will not allow settlor to transfer under the policy rationale that enforcement of the spendthrift provision protects the beneficiary from him/herself.

Question 41

What is a discretionary trust?

Answer 41

A trustee is given sole and absolute discretion in determining how much to pay the beneficiary if anything and when to pay the beneficiary if ever.

The terms of the trust must include the definition, which will state,”Trustee shall have full, sole, and absolute discretion in determining when to pay the beneficiary an dhow much to pay the beneficiary.”

Question 42

Can beneficiary evern transfer his interest, his right to future payments?

Answer 42

Say this on the bar:

1. On the one hand, no: Beneficiary cannot voluntarily transfer his right ot future paymnets because, the question may be asked, what exactly is the beneficiary assigning? The B may not get anything.
2. On the other hand, if in fact there was an assignment, then the assignee steps into the shoes of the beneficiary. Because the B could not force apyment by the trusetee, neither can the assignee. However, if the trustee has notice of the assignment and does decide to pay, then the trustee must pay the assignee or be held personally liable.

Question 43

Can creditors ever attach the beneficiary’s right to future payments notwithstanding tehe discretionary trust provision?

Answer 43

Say this:
1. On the one hand, creditors cannot attach the beneficiary’s right to future payments because there is nothing to attach. The trustee may never allocate anything to the B. The B could not force payment, and neither can the creditors.

2. On the other hand, if the trustee has notice of the debt and the creditor’s judgment against the beneficiary, and the trustee does decide to pay, he must pay the creditors or be held personally liable.

Question 44

Can a settlor ever create a discretionary trust for herself?

Answer 44

Weird. Same as rules for spendthrift trusts.

As to involuntary alienation: the majority of jxs the provisions are not recognized. Insulating yourself from your creditors violates public policy. A few jxs allow it.

As to voluntary alienation: Split: Most jxs will ignore the provision and allow settlor to voluntarily alienate. Some will not allow settlor to transfer under the policy rationale that enforcement of the spendthrift provision protects the beneficiary from him/herself.

Question 45

Truetee in his sole and absolute discretion, shall pay the amount needed for the beneficiary’s support and maintenance. What result?

Answer 45

Say this on the bar:

1. Because of the words sole and absolute, it could be a discretionary trust. Then apply the discretionary trust rules.
2. Also, because of the words support and maintenance, it coudl also be a support trust. Then apply the rules of support trust to the facts.

Question 46

What is a resulting trust?

Answer 46

A resulting trust is an implied in fact trust and is based upon the presumed intent of the parties. If a resulting trust is decreed by the court, the resulting trustee will transfer the property to the settlor if the
settlor is alive, and if not, to the settlor’s estate, i.e. to the residuary devisees if any, and if none, to the intestate takers (the heirs).

Question 47

What are the 7 situations in which a resulting trust arises?

Answer 47

1. When a private trust ends by its own terms, and there is no provision for what happens to the corpus thereafter.
2. When a private express trust fails, because there is no beneficiary.
3. When a charitable trust ends because of impossibility or impracticability and Cy Pres cannot be used.
4. When a private express trust fails because after creation, the trust becomes illegal.
5. When there is excess corpus in a private express trust.
6. When we have a “purchase money resulting trust.”
7. Semi-secret trusts: arises when the will makes a gift to a person to hold as trustee, but does not name the beneficiary.

Question 48

What is a purchase money resulting trust?

Answer 48

E.g. A pays consideration to B to have title to property transferred to C.

If A and C are not closely related, there is a reubttalbe presumption that C is holding as a purchase money resulting trustee for the benefit of A.

If A and C are closely related, there is a rebuttable presumption that A simply made a gift to C.

Question 49

What is a semi-secret trust?

Answer 49

arises when the will makes a gift to a person to hold as trustee, but does not name the beneficiary.

Eg. I devise $100,000 to Abel as trustee.
• The will on its face shows a trust intention, but the beneficiary cannot be ascertained.
• No parol evidence is allowed, and instead courts decree a resulting trust.

**Distinguish from secret trusts where the courts allow in parol evidence and create a constructive trust.

Question 50

What is a constructive trust?

Answer 50

A remedy to prevent fraud or unjust enrichment. A misnomer because it’s not really a trust. It is a means to disgorge a wrongdoer of his ill-gotten gains. When a court decrees a constructive trust, the wrongdoer will have only one obligation: to transfer the property to the intended beneficiary as determined by the court.

Question 51

What are the 4 situations in which a constructive trust arises?

Answer 51

1. Where the trustee of a private express trust or a charitable trust makes a profit because of self-dealing.
   •court will determine the intended beneficiary and trustee will be a constructive trustee and will have to turn over the ill-gotten profits
2. With respect to the law of wills, when ther is fraud in the inducement or undue influence.
3. Secret trusts in teh law of wills
4. Oral real estate trusts (Breach of promise)

Question 52

What is a secret trust?

Answer 52

The will on its face makes a gift outright to A, but the gift is given on the basis of an oral promise by A to use the property for the benefit of B.

E.g.: T goes to A and says, “A, I shall devise $100,000 to you , if you promise to use this money for the benefit of B.” A states to T that he (A) will comply. Thereafter T executes his will that states, “I devise $100,000 to A.”
• From the face of the will, it seems that A owns the $100,000 for himself, free of any trust.
•Parol evidnece is admissible to show that the beneficiary was B.
• A will become a constructive trustee who will have only one obligation: to transfer to B.

Question 53

If you see a secret or semi-secret trust on the exam:

Answer 53

explain and define both. then apply the appropriate doctrine for the facts at hand.

Question 54

What is an oral real estate trust?

Answer 54

aka Breach of Promise

E.g. S goes to A and states, “If I transfer Blackacre to you by deed, will you hold Blackacre for the benefit of B?” A agrees. Thereafter S executes a deed in favor of A and delivers it to A.
•From the 4 corners of the deed, A seemingly owns the property in fee simple absolute, free of any trust.
• Generally B can raise the statute of frauds as an affirmative defense and keep to the property for himself, but there are 3 situations where A will not be allowed to do so. In such case, A will be decreed a constructive trustee who will transfer to B.

3 situations:
1. If there is a fiduciary relationship between S and A, A becomes a constructive trustee, who has only one obligation: to turn over to the intended beneficiary.

2. There was fraud in teh inducement on A’s part. S went to A and said, “If I transfer Blackacre to you in fee simple, do you promise to hold for the benefit of B,” and A says yes, while he is thinking to himself, “What a fool!” This is fraud in the inducement.
3. There was detrimental reliance by B, the intended beneficiary: I B relied to his detriment on the existence of this oral real eestate trust, then B will get the property from A via a constructive trust. Look for B taking possession and making improvements. possession alone is not enough.

Question 55

What powers does the trustee have?

Answer 55

All enumerated and all implied powers.

Implied powers are powers helpful and appropriate to carry out the trust purpose.

E.g.

1. the power to sell trust property
2. the power to incur expenses
3. the power to lease
4. the power to borrow (only under modern law, not common law).

Question 56

What duties does the trustee owe to the beneficiary?

Answer 56

1. Duty of Loyalty
2. Duty to Invest
3. Duty to earmark
4. Duty to segregate
5. Duty Not to Delegate
6. Duty to account
7. Duty of due care

Question 57

What is the duty of loyalty that a trustee owes the beneficiary?

Answer 57

Requires that the trustee administer the trust for teh benefit of the beneficiaries (implicitly, trustee must be impartial), having no other consideration in mind.

Corollary: no self-dealing
E.g. of self dealing:
1. trustee prefers one beneficiary, his child, over the others
2. trustee sells trust property to trustee’s spouse
3. trustee-lawyer hires himself

Question 58

What are the consequences to finding a breach of the duty of loyalty or self-dealing?

Answer 58

1. If there is a loss, the trustee is “surcharged” meaning that the trustee hs to make good the loss.
2. If the trustee makes a personal profit, then with respect to those ill-gotten profits, the trustee is a constructive trustee: must turn over those profits to the intended beneficiary.

Question 59

What is the trustee’s duty to invest?

Answer 59

Split of Authority: There are 3 alternative rules of the duty to invest. Discuss all 3 on the exam:

1. State lists: some states have lists which the trustee must follow in the absence of directions in the trust. Good investments in these jxs are:
   • federal gov’t bonds
   • federally insured certificates of deposit
   • first deeds of trust in real estate
   • sometimes stocks of publicly traded corps.
   • never invest in a new business
   • never invest in second deals of trust in real estate
2. Common law prudent person test: The duty to invest requires the trustee to act as reasonably prudent person investing his own property, trying to maximize income while preserving corpus. If the trustee holds himself out as having greater skill, he is held to that higher standard.
   •Each individual investment is scrutinized.
   • Good investments include:
   • fed gov’t bonds
   • first deeds of trust in real estate
   • federall insured certificates of depost
   • blue chip stocks
   • mutual funds maybe
   • never new business or 2nd deeds of trust in real estate
3. Uniform prudent investor act: adopted by most states: the act simply proivdes that the trustee must act as a “prudent investor.”
   • Key: performance is measured in teh context of the entire portfolio, not each individual investment.

Question 60

Regarding the trustee’s duty to invest, under any standard, the trustee has a duty to _________, so that if there is a loss, the entire portfolio is not wiped out.

Answer 60

diversify

Question 61

What is the consequence if a trustee breaches the duty to invest?

Answer 61

In any jx, trustee must make good the loss. If there is a profit, the beneficiaries affirm the transaction. If the trustee makes 2 investments that breahc the duty to invest, one makes money and the other loses money, the trustee is surcharged for the loss while the beneficiaries affirm the transaction that made money. No netting by trustee.

Question 62

What is the duty to earmark?

Answer 62

Requires the trustee to label all trust property as trust property.

E.g. If trustee owns share of stock and it is property earmarked, the stock will be registered to “John Smith, as trustee of the ABC trust.”

Question 63

What are the consequences of trustee breaching the duty to earmark?

Answer 63

Common law approach: If there is a loss, the trustee is held personally liable. No causal relationship required between failure to earmark and a loss. Thus, if the stock market crashes and there is a loss, trustee is held personally liable even though the failure to earmark did not casue the loss.

Moderm approach: If there is a failure to earmark and there is a loss, the trustee is held personally liable only if the loss was caused by the failure to earmark.

Question 64

What is the duty to segregate?

Answer 64

The trustee cannot commingle his own personal funds with trust funds. Requires that the trustee not commingle the funds of Trust A with the funds of Trust B.

Question 65

What is the consequnece of a breach of the duty to segregate?

Answer 65

The trustee can be removed and be held liable for any loss.

Question 66

What is the duty not to delegate?

Answer 66

The trustee can rely on professional advisors in reaching a decision, but the trustee cannot delegate decision-making authoirty to these advisors.

• Under common law, trustee could not delegate the duty to invest to a professional money manager.
• Modernly, a trustee can delegate this duty (e.g. to a manager of a mutual fund).
• A trustee also cannot delegate to another trustee.
• Under common law int hea bsence of a contrary provision in the trust instrument, trustees must act unanimously. Modernly trustees can act by majority decision.

Question 67

Under common law int hea bsence of a contrary provision in the trust instrument, trustees must act ___________. Modernly trustees can act by __________.

Answer 67

unanimously; majority decision

Question 68

What is the duty to account?

Answer 68

Requires the trustee on a regular basis to give the beneficiaries a statement of income and expenses of the trust.

If the trustee fials to render an accounting to the beneficiaries, the beneficiaries would file an action for an accounting.

Question 69

What is a trustee’s duty of care?

Answer 69

The trustee must act as a reasonably prudent person dealing with his own affairs.

Question 70

What are possible remedies of beneficiary for breach of duty or duties?

Answer 70

1. damages
2. constructive trust remedy
3. tracing and equitable lien on property
4. ratify the transaction if good for B
5. remove trustee

Question 71

T/F: On the bar exam, there will never be just one duty breached. There will always be at least 3.

Answer 71

True, generally. Duty of care is always able to be discussed.

Question 72

What is the trustee’s liability in contract?

Answer 72

Common law: trustee is sued in his personal capacity. Trustee’s personal assets are at stake. Trustee can get indemnification from trust assets if the trustee acted within his or her powers and was not personally at fault.
• The only way trustee would be sued in his representative capacity is if the contract itself provided that in the event of a breach by the trustee, the trustee is to be sued in his representative capacity. Not enough in common law that trustee signed the contract, “John, as trustee of ABC trust.”

Modern law rule: If the other person to the contract, the promisee, knows that the trustee is entering into the contract in his representative capacity, then the trustee must be sued in his representative capacity.
•Thus, if trustee signs “John, as trsutee of ABC corp,” trustee must be sued in rep capacit.

Question 73

What is the trustee’s liability in tort?

Answer 73

Common law: Trustee is sued in his personal capacity. If the trustee was without personal fault, however, the trustee can get indemnification from trust assets. (strict liability or agent committed negligent act).

Modern rule: Trustee is sued in his individual capacity and is personally liabel for torts only if the trustee is persoanlly at fault.

Question 74

Can the settlor modify the trust?

Answer 74

If he expressly reserves the power to modify the trust or if he has the power to revoke.

Power to revoke is the greatest power.

Question 75

When can the court modify a trust?

Answer 75

1. Cy pres situations
2. Deviation power (doctrine of changed circumstances): court changes the administrative or managment provisions of the trust (not beneficiaries).

Question 76

How/when can the court use its deviation power?

Answer 76

2 elements must be established:

1. unforeseen circumstances on the part of the settlor; and
2. necessity (deviation needed to preserve the trust).

E.g. Example: Settlor creates a valid private express trust,providing that the trustee can invest only in bonds andcannot invest in stocks. The trust was created during theGreat Depression, when the stock market collapsed. In 1955, after the stock market rebounded and during a time of high inflation, the trustee petitions the court to allow
investing in stocks because without such investing, within 20 years inflation will outpace the investments presently authorized to the point where the trust will not be able to pay trust expenses, let alone pay income to the
beneficiaries.

If we stipulate that settlor [i] could not foresee the rate of inflation and the resurgence of the stock market and [ii] without deviation, the trust
will go broke, the court will allow deviation: trustee will be authorized by the court to deviate from the trust instrument and invest in stocks.

Question 77

When does a settlor have the power to revoke?

Answer 77

1. Majority rule: The settlor must expressly reserve the power in the trust instrument.
2. Minority rule: Settlor has the power to revoke, unless the trust is expressly made irrevocable.

Question 78

What are the 3 ways an irrevocable trust can terminate prematurely (before th time set for termination in the trust instrument)?

Answer 78

1. Settlor and all beneficiaires agree to terminate.
   • All the beneficiaries means you must account for contingent remandermen: guardian ad litem (a guardian appointed to represent those parties to a suit who are incapacitated by infancy or otherwise) must be appointed to represent them.
2. All the beneficiaries agree to terminate and all the material purposes have bene accomplished.
   • reason: equity will not see a trust continue to carry out a minor or insignificant purpose. Court will make sure there is enough money to complete small purpsoes, but no need for a $100 million trust to accomplish a $100 purpose.
   • need guardian ad litem for unborn beneficiaries, kids, etc.
3. By operation of law: passive trusts and the statute of uses
   • Statute of uses arises when you have a private express trust with a corpus of real property, and the trust is passive (the trustee has no active duties and is just holding bare legal title).
   • In such cases, under the Statute of Uses, the beneficiaries get legal title by operation of law, and thus the trust terminates.
   •Not all jxs recognize the statute of uses.

**The statute of uses does not apply to passive trust of stock or other personal property, but by analogy, the principles of the statute of uses should apply because equity shoudl not see a useless act done.

Question 79

Under the uniform principal and income act, what income and expesnses are allocated to the life tenant?

Answer 79

Income:

1. cash dividends
2. interest income
3. net business income

LT’s interest pays for the following expenses:

1. interest on loan indebtedness
2. taxes
3. minor repairst (e.g. paint job).

Question 80

Under the uniform principal and income act, what income and expenses are allocated to the remainderman?

Answer 80

Remainderman gets the following income:

1. stock dividends
2. stock splits
3. net proceeds on the sale of a trust asset

Remainderman’s interest pays for the following expenses:

1. principal part of loan indebtedness
2. major repairs or improvements (new wing on a building).

Question 81

What is the adjustment power of the trustee under the uniform principal and income act?

Answer 81

1. Trustee can disregard the remainderman & life tenant rules regarding allocaiton of income if a different allocation is necessary to administer the trust fairly.

E.g. If the only income from the trust is from the sale of trust assets, trustee may allocate some of the income to the life tenant.