Fixed and Discretionary Trusts Flashcards
Which of the following is a key difference between a fixed trust and a discretionary trust?
A) A fixed trust allows trustees to decide who the beneficiaries are.
B) A discretionary trust requires trustees to distribute the trust fund in equal shares.
C) A fixed trust requires trustees to distribute the trust property as directed by the settlor, whereas a discretionary trust gives trustees the power to decide who benefits and to what extent.
D) A discretionary trust provides beneficiaries with an absolute right to the trust property.
C) A fixed trust requires trustees to distribute the trust property as directed by the settlor, whereas a discretionary trust gives trustees the power to decide who benefits and to what extent.
Explanation:
In a fixed trust, the settlor determines the entitlement of beneficiaries, and trustees must distribute accordingly. In a discretionary trust, trustees have discretion over how to distribute the trust fund among potential beneficiaries. The other options misstate the characteristics of these trusts.
In a life interest trust, who is entitled to the capital of the trust property?
A) The life tenant
B) The remainderman
C) The trustee
D) The income beneficiary
B) The remainderman
Explanation:
A life interest trust grants the life tenant the right to receive income from the trust during their lifetime. However, once the life tenant dies, the capital is transferred to the remainderman, who then becomes absolutely entitled to it.
Mark is named as a potential beneficiary under a discretionary trust. The trustees have yet to exercise their discretion in his favor. What rights does Mark currently have?
A) He has an equitable proprietary interest in the trust property.
B) He has a personal right to force the trustees to distribute the trust fund to him.
C) He has no proprietary interest but can ensure the trustees properly consider him as a potential beneficiary.
D) He has the right to demand a fixed share of the trust property.
C) He has no proprietary interest but can ensure the trustees properly consider him as a potential beneficiary.
Explanation:
Potential beneficiaries under a discretionary trust do not have an equitable proprietary interest in the trust property until the trustees exercise their discretion in their favor. However, they do have a right to ensure that the trustees properly consider them when exercising their discretion.
Under the rule in Saunders v Vautier, when can beneficiaries bring a trust to an end?
A) When they are all over 18, of sound mind, and absolutely entitled to the trust property.
B) Only if the settlor consents to the termination.
C) When the trustee agrees that the trust is no longer needed.
D) Only if the trust document explicitly states that they can do so.
A) When they are all over 18, of sound mind, and absolutely entitled to the trust property.
Explanation:
The rule in Saunders v Vautier allows beneficiaries to terminate a trust and demand the trust property if they are all legally capable (i.e., over 18 and of sound mind) and together hold the entire beneficial interest in the trust.
Sarah is given a power of appointment in a trust deed, allowing her to distribute trust property among her three children as she sees fit. What is the nature of Sarah’s obligation?
A) She must distribute the property equally among her children.
B) She is not obligated to distribute the property but must periodically consider doing so.
C) She must distribute the trust fund within a set time limit.
D) She has no discretion and must follow the trustee’s instructions.
B) She is not obligated to distribute the property but must periodically consider doing so.
Explanation:
A power of appointment allows the donee (Sarah) discretion over whether to distribute the property. If it is a fiduciary power, she must periodically consider exercising it, but she is not required to do so. This contrasts with a discretionary trust, where trustees must exercise their discretion.
Why is certainty of objects important in trust law?
A) It ensures that the trustee has total freedom over who benefits.
B) It prevents the court from interfering with trust administration.
C) It ensures that trustees know to whom they owe obligations and enables enforcement.
D) It is only required for charitable trusts.
C) It ensures that trustees know to whom they owe obligations and enables enforcement.
Explanation:
Certainty of objects is crucial because trustees must know who the beneficiaries are in order to properly administer the trust. Without certainty, the trust may fail as the trustee would not be able to fulfill their obligations, and beneficiaries would not be able to enforce their rights.
A trust document states: “My trustees may distribute the trust fund among my grandchildren as they see fit. If they do not exercise this discretion within five years, the trust fund shall pass to my nephew.” What does this clause indicate?
A) It is a discretionary trust with a gift-over clause.
B) It is a fixed trust with a contingent remainder.
C) It is a bare trust.
D) It is a successive interest trust.
A) It is a discretionary trust with a gift-over clause.
Explanation:
The clause gives the trustees discretion to distribute the trust fund among the grandchildren, making it a discretionary trust. The presence of a fallback provision (where the trust fund passes to the nephew if the discretion is not exercised) is a gift-over clause, which ensures that the trust property does not remain indefinitely undistributed.
Which of the following is true regarding trustee duties in a fixed trust?
A) Trustees have absolute discretion over how to distribute trust property.
B) Trustees must distribute the trust property according to the settlor’s instructions.
C) Trustees have no obligation to distribute the trust property.
D) Trustees must divide the trust property equally among all beneficiaries.
B) Trustees must distribute the trust property according to the settlor’s instructions.
Explanation:
In a fixed trust, trustees have no discretion over distribution. The settlor determines the beneficial entitlements, and trustees must follow these directions precisely.
Daniel is a trustee of a discretionary trust and has decided to distribute the trust property solely to one beneficiary, without considering the others. What can the other potential beneficiaries do?
A) They can challenge the decision and compel the trustee to distribute the property equally.
B) They can request the court to ensure the trustee exercises their discretion properly.
C) They have no legal recourse since discretionary trusts give absolute discretion to trustees.
D) They can remove the trustee without court intervention.
B) They can request the court to ensure the trustee exercises their discretion properly.
Explanation:
While potential beneficiaries under a discretionary trust cannot demand a share of the trust property, they can challenge a trustee’s failure to properly exercise their discretion. The court can intervene to ensure that trustees act in accordance with their duties.
Which of the following correctly differentiates between a discretionary trust and a fiduciary power of appointment?
A) A discretionary trust requires trustees to exercise their discretion, whereas a fiduciary power of appointment does not have to be exercised.
B) A fiduciary power of appointment grants absolute rights to the beneficiaries, whereas a discretionary trust does not.
C) A discretionary trust gives trustees discretion to distribute assets unequally, whereas a fiduciary power requires equal distribution.
D) Both must be exercised in favor of all potential beneficiaries.
A) A discretionary trust requires trustees to exercise their discretion, whereas a fiduciary power of appointment does not have to be exercised.
Explanation:
Trustees of a discretionary trust must distribute trust property but have discretion over how they do so. A fiduciary power of appointment does not require exercise but must be periodically considered.
Which of the following describes the rights of a beneficiary under a discretionary trust?
A) They own a fixed percentage of the trust property.
B) They have no equitable proprietary interest until the trustee exercises discretion in their favor.
C) They can compel the trustee to distribute the trust fund to them.
D) They have no ability to challenge trustee decisions.
B) They have no equitable proprietary interest until the trustee exercises discretion in their favor.
Explanation:
A discretionary beneficiary has only a hope of benefiting from the trust. Until the trustees exercise discretion, they do not own a fixed part of the trust fund. However, they can ensure trustees act properly.
Which statement best describes a power of appointment?
A) The trustee must distribute trust property among beneficiaries.
B) The donee of the power may choose to distribute trust property but is not obligated to do so.
C) The settlor retains control over distributions.
D) The power must always be exercised.
B) The donee of the power may choose to distribute trust property but is not obligated to do so.
Explanation:
A power of appointment allows the donee (e.g., a trustee) to decide whether to distribute trust assets among specified objects. If they do not exercise the power, the default provision applies (if one exists).
A trustee of a discretionary trust fails to consider distributing trust property among the potential beneficiaries for five years. What legal principle applies?
A) The trustee has absolute discretion and cannot be challenged.
B) The trustee must consider exercising their discretion periodically.
C) The discretionary trust automatically converts into a fixed trust.
D) The potential beneficiaries lose their right to receive distributions.
B) The trustee must consider exercising their discretion periodically.
Explanation:
In a discretionary trust, trustees do not have to distribute the trust fund, but they must actively consider whether to do so. If they fail in this duty, the beneficiaries can challenge their inaction.
In a life interest trust, what happens to the trust property after the life tenant dies?
A) The trust property automatically returns to the settlor.
B) The remainderman becomes entitled to the trust capital.
C) The trustee retains ownership of the trust property.
D) The trust property must be sold and distributed equally among all living beneficiaries.
B) The remainderman becomes entitled to the trust capital.
Explanation:
In a life interest trust, the life tenant receives income from the trust during their lifetime. Upon their death, the remainderman (capital beneficiary) becomes entitled to the trust capital.
A trustee of a fixed trust misallocates trust property, giving a beneficiary more than their entitled share. What legal remedies are available?
A) The affected beneficiary can sue the trustee for breach of trust.
B) The trustee can reallocate the remaining funds to fix the mistake.
C) The trust automatically terminates.
D) The overpaid beneficiary must return the excess amount.
A) The affected beneficiary can sue the trustee for breach of trust.
Explanation:
Trustees of a fixed trust must distribute the trust property correctly. If they fail to do so, beneficiaries can sue for breach of trust. Equitable remedies, such as tracing and repayment, may be applied.
