Creation, Termination, Modification of Trust

Question 1

Requirements of Expressive Private Trust

Answer 1

1. Settlor with Capacity + Present Intent
2. Trustee
3. Trust Property
4. Beneficiaries
5. Valid Trust Purpose
6. Formalities Met

Question 2

Settlor with Capacity and Present Intent Requirement

Answer 2

1. Must intend trust to take effect immediately
2. Must express intent by words or conduct while settlor owns property
3. Precatory expressions result in inference that no trust was intended, but presumption may be overcome by other evidence

Question 3

Trustee Requirement

Answer 3

1. Failure to name trustee does not defeat a testamentary trust; court will appoint
2. Inter vivos trust will fail without a trustee because there can be no valid delivery and transfer of trust property
3. Trustee must have duties
4. Settlor may declare himself trustee

Question 4

Trust Property (Res) Requirement

Answer 4

1. Property may be of any type, including future interests
2. Must be property that settlor has the power to convey
3. Must describe with certainty

Question 5

Beneficiaries Requirement

Answer 5

1. Must be capable of taking and holding property
2. Must be definite
3. Notice not required but beneficiary must accept; acceptance presumed.

Question 6

Valid Trust Purpose Requirement

Answer 6

Trust or provision must not be illegal; impossible; contrary to public policy; intended to defraud; or based on illegal consideration.

Note:
1. Effect of invalid condition subsequent- condition stricken, trust valid
2. Effect of invalid condition precedent - condition stricken, but court decides whether trust fails

Question 7

Formalities of Inter Vivos Trust

Answer 7

Inter Vivos trust = created during settlor’s life.

Must be:
(1) declaration of trust by property owner that he holds in trust; or (2) transfer of property by the settlor to the trustee.

No writing required unless trust for land (SoF)

Question 8

Formalities of Testamentary Trust

Answer 8

Testamentary Trust = created by settlor’s will

1. essential terms must be ascertained from will, incorporated document, facts of independent significance, or exercise of power of appointment
2. secret trust (absolute gift but trust intended) - constructive trust imposed
3. semi-secret trust (gift in trust without beneficiary) - resulting trust for testator’s heirs

Question 9

Will a settlor’s promise to create a future trust be valid?

Answer 9

A settlor’s promise to create a trust in the future is valid only if: (i) supported by consideration ; or (ii) he manifests anew an intention to create the trust when the assets come into existence.

Question 10

What happens when a trust is terminated?

Answer 10

Upon termination, the trustee must distribute the property in accordance with the terms of the trust

Question 11

when can a court deviate from the trusts’ terms?

Answer 11

At CL: court may authorize or direct a trustee to deviate from the administrative terms of the trust if the settlor did not know or anticipate the new circumstances and compliance with the terms would defeat/substantially impair accomplishment of the trust’s purposes.

UTC: court-sanctioned modification can be sought if the trust could have been modified if all beneficiaries had consented and the interests of any non consenting beneficiaries were adequately protected.

Question 12

what is the doctrine of equitable deviation?

Answer 12

reformation of a trust by the court

Question 13

Can the court change the beneficial rights of the beneficiaries named in the trust?

Answer 13

At CL: NO - the doctrine of changed circumstances cannot be used to change the beneficial rights of the beneficiaries.

The UTC: YES - the restriction against changing the beneficiaries’ rights does not exist; thus, if unanticipated circumstances threaten the purpose of the trust, the court will permit modification

Note: Many states give the court the power to invade the principal for an income beneficiary if the court finds that support of the income beneficiary was the primary purpose of the trust.

Question 14

Modification and Termination By Settlor

Answer 14

UTC: trusts presumed revocable and amendable unless terms expressly state otherwise

Traditional rule: irrevocable is presumed; you have to reserve the right to revoke or modify

Note: Power to revoke includes the power to modify

Question 15

Modification and Termination By Beneficiaries

Answer 15

May terminate or modify if:
(a) settlor and beneficiaries consent, even if conflicting with material purpose; or
(b) all beneficiaries consent, and no material purpose would be frustrated

Note: watch for remote, unborn beneficiaries - representative can be appointed to represent interests of the minor, unborn, or unascertained beneficiaries

Question 16

When will a material purpose be frustrated?

Answer 16

1. Trust calls for distribution at a certain age
2. Preserving property for remainderman
3. protecting beneficiaries from poor judgment (i.e., spendthrift provision; most states will not terminate a trust without settlor’s consent if trust has spendthrift provision)

Question 17

Modification and Termination By Court

Answer 17

May modify if:
(a) trust could have modified if all beneficiaries had consented and interests of non consenting beneficiaries will be protected
(b) unanticipated circumstances arise that threaten settlor’s trust purpose
(c) trust value insufficient to justify administration or achieve a tax objective
(d) continuation of trust is impracticable or wasteful

May terminate if:
(a) unanticipated circumstances
(b) value insufficient

Question 18

Can a record reform a trust instrument?

Answer 18

Yes - may reform to reflect settlor’s intent IF clear and convincing evidence shows settlor’s intent and trust were affected by a mistake

Question 19

Termination by Trustee

Answer 19

May terminate if trust property is less than $50,000 and is insufficient to justify administrative costs