Cliff notes for Trusts Flashcards
What makes a trust valid
A trust is valid if it has:
- TRUSTEE
- BENEFICIARY and
- TRUST PROPERTY
- Settlor’S PRESENT INTENT to create a trust
Trustee’s Duty of Care
Requires the trustee to INVEST and MANAGE trust assets as PRUDENT INVESTOR would.
A trustee’s investments should NOT be evaluated in isolation but in the CONTEXT OF THE PORTFOLIO AS WHOLE and as part of an investment strategy
Trustee’s Duty of Loyalty
Requires the trustee to administer the trust SOLELY IN THE INTEREST OF THE BENEFICIARIES.
No self-dealing, these transactions subject to “no further inquiry rule”
- Personally buying or selling trust assets
- Taking an opportunity belonging to trust
- Purchasing its own corporation’s stock
Courts follow “NO FURTHER INQUIRY RULE” regarding trustee self-dealing, which says court will not inquire about trustee’s motivation or fairness of action and will only seek to determine measure of damages
Trustee’s Duty to Allocate Property to Principal and Income
Dictates whether receipts earned during the administration of trust should be allocated to the income or the principal.
Most states have adopted the Uniform Principal and Income Act, which specifies how receipts should be allocated.
General rule is that ordinary expenses allocated to trust income and
extraordinary expenses allocated to trust principal
Assets allocated to Principal (PLEAD)
Money received from Principal asset
Life insurance proceeds
Eminent domain awards
All property other than money received from an entity
Distribution of stock
Assets allocated to Income (RIM)
Rental Income
Interest
Money
Revocability
Under the Uniform Trust Code (UTC), an inter vivos trust is presumed to be revocable unless the instrument expressly states otherwise.
A revocable trust is amendable even if the trust instrument does not expressly grant the settlor the power to amend.
If a trust is revocable, the settlor **may terminate the trust at any time. **
If trust is IRREVOCABLE, the settlor may terminate the trust if all beneficiaries are in existence, and all agree.
Irrevocable trust after settlor dies
After the settlor dies, an irrevocable trust can be terminated if both the income beneficiaries and the remaindermen* unanimously consent,
**and if there is **no material purpose **of the trust **yet to be performed.*
Terminating an IRREVOCABLE TRUST
Cy pres
Cy pres is a CL doctrine that’s also part of the UTC.
Under the UTC, if
1. a particular charitable purpose has become unlawful, impracticable, or impossible;
2. no alternative charity is named in the trust; and
3. the court finds that the settlor had a general, rather than a specific, charitable purpose,
THEN the court may apply the doctrine of cy pres and direct that the trust property be distributed in a manner consistent with the settlor’s general charitable intent.
Powers of appointment
A person writing a will or trust can give their Bs a power of appointment which lets Bs designate who will receive specific trust or estate property.
Two Types of Powers of Appointment
General Power of Appt.- provides for an UNLIMITED class of people in favor of whom the B can exercise a power of appt.
Special/Limited Power of Appt. - provides for a limited class of people in favor of whom the B can exercise a poiwer of appt.
Appointments to impermissible appointees are INVALID
Pourover Will
A type of trust created when a will makes a gift to a trust.
Valid if
- the trust is identified in will
- AND terms are incorporated in a writing executed BEFORE or CONCURRENTLY with the will
Discretionary Trust
The trustee has discretion to decide when to make a distribution to a beneficiary.
Beneficiary cannot demand any part of the income or principal and cannot ask court to COMPEL a distrubution
UNLESS trustee abuses their discretion
Neither can a creditor, except for child support or alimony in some states.
Support trust
Trustee must pay what is necessary for the beneficiary’s support. The meaning of “support” is fact dependent.
Spendthrift trust
Restrains both the voluntary and involuntary transfer of a beneficiary’s interest.
Only creditors that can reach a B’s distribution before it reaches the beneficiary are:
- child or spousal support creditors
- judgment creditor who has provided services for the protection of a beneficiary’s interest in the trust
- the state or the US
- creditor with a claim for necessities (only some states recognize this exception)
Charitable trust
**Trust created for a charitable purpose. **
Beneficiaries must be a large number of individuals who are not readily identifiable.
May be **terminated **if charitable purpose becomes unlawful, impracticable, or impossible.
Doctrine of cy pres may save trust
