Just Trusts (smart sheets)

Question 1

Trust formation

Answer 1

A valid trust requires:
1. a definitive beneficiary
2. a settlor with capacity
3. intent to create a trust
4. a trustee named
5. a valid trust purpose
6. trust property AND
7. compliance with any state formalities.

Question 2

Intent

Answer 2

There is intent when the trustor manifests unequivocal intent to create a trust.

Question 3

Trust property

Answer 3

A trust is not created until it receives valid property, but does not have to be contemporaneous with the writing.

Question 4

Purpose

Answer 4

A trust purpose is valid when it is legal and not against public policy.

Question 5

Trustee

Answer 5

A trustee is a person designated to administer the trust.
A trust will not fail when a trustee fails to act, dies, is removed, or resigns.
The court may appoint a trustee.
A person cannot be the sole trustee and the sole beneficiary.

Question 6

Beneficiary

Answer 6

A beneficiary is someone who has interest in the trust.
A trust must have a beneficiary to enforce the trust.
A beneficiary can be natural persons, corporations, or organizations.

Question 7

Revocable & Irrevocable trusts: Majority view

Answer 7

Revocable by default unless the trust states otherwise.

Question 8

Revocable & Irrevocable trusts: Minority view

Answer 8

Irrevocable by default unless the trust states otherwise.
Irrevocable trusts cannot be modified or revoked.

Question 9

Testamentary trust

Answer 9

Created through the provisions of a settlor’s will, and does not take effect until the settlor’s death.

Question 10

Creation of a testamentary trust

Answer 10

1. will must state the essential trust terms (beneficiaries, purpose, property) AND
2. intent must be found from
   a. the express terms of the will or
   b. incorporation by reference or a document/writing one existence at the time the will was executed.

Question 11

Pour-Over provision

Answer 11

When a will gifts property to a previously established trust.
A pour over provision does not create a trust- it must be connected to a previously created inter vivo trust (a trust created during the testator’s lifetime)

Revocation or termination of the trust before the testator’s death causes the gift to lapse.

Question 12

Charitable trust

Answer 12

A trust that confers a substantial benefit to society.

Beneficiary may be indefinite or a class of persons.

RAP does not apply.

Failure to state a specific trust purpose or beneficiary does not make the trust fail. The court will select one.

Question 13

Discretionary trust

Answer 13

when the trustee has absolute discretion and power to determine when and how much of the trust property is distributed to the beneficiaries.

trustee’s exercise of discretion must be in good faith. A court will only interfere if abuse of discretion.

Question 14

Support trust

Answer 14

A support trust is a trust directing the trustee to pay the beneficiary as much income as is necessary for the beneficiary’s support.

Under a pure support trust, the trustee has no discretion.
Compare with a discretionary support trust

Question 15

Discretionary support trust

Answer 15

A trustee has discretion in paying the beneficiary for her support.

If is contains an ascertainable standard, a beneficiary may bring an action to compel the trustee to make payments in accordance with that standard.

HEMS is common standard.

Question 16

How trust assets pass

Answer 16

trust assets pass according to the terms of the trust.

If a testamentary trust/distribution fails, the trust property passes:
a. under a residuary clause in a will, or
b. to the settlor’s heirs by intestacy

Question 17

Cy Pres

Answer 17

A court will modify a charitable devise as near as possible with the settlor’s intent if the purpose of the trust is frustrated (becomes impracticable, impossible, or is wasteful).

Only applies if the testator had general charitable intent.

Question 18

Spendthrift trust

Answer 18

A spendthrift provision prevents the transfer of a beneficiary’s interest in a trust.

Valid ONLY if it restrains both voluntary and involuntary transfers.

Spendthrift trusts do not provide protection for mandatory distributions of property.

A spendthrift interest cannot be sold or assigned by the income beneficiary.

Question 19

When can a creditor reach a beneficiary’s spendthrift trust interest?

Answer 19

1. a judgment creditor who provided services for the protection of a beneficiary’s interest in the trust;
2. creditor who furnished necessities
3. order for child support or alimony
4. claim by a state or federal government
5. self-settled trust

Question 20

Self-settled trust

Answer 20

Where settlor retains an interest

Question 21

Rights of creditors: spendthrifts

Answer 21

A creditor can collect under a spendthrift provision ONLY after a payment is made to a beneficiary unless an exception applies.

If no spendthrift provision, the creditor may attach present or future distributions to the beneficiary.

Question 22

Rights of creditors: Discretionary trust

Answer 22

A creditor cannot compel a distribution subject to the trustee’s discretion, even if:
a. discretion is expressed in the form of a standard distribution; OR
b. the trustee abused their discretion.

Question 23

Discretionary trusts and child/spousal support

Answer 23

if a judgment or order exists for unpaid child/spousal support, the court may:
1. order a distribution to satisfy the judgment, and
2. direct the trustee to pay the child, spouse, or former spouse.

Question 24

Powers of invasion: Invasion of trust principal

Answer 24

if a beneficiary will eventually receive trust principal, a court MAY permit invasion unless it:
1. is contrary to the settlor’s intent, OR
2. adversely affects the other beneficiaries.

Question 25

Express/implied powers in invasion

Answer 25

A trustee cannot use trust property to pay income beneficiaries when trust income is insufficient unless there is an express or implied power of invasion (derived from Settlor’s words of conduct).

Question 26

A court may also permit invasion if:

Answer 26

its in the best interest of the beneficiaries or its for the maintenance and support of the beneficiaries.

Question 27

Modification: majority view

Answer 27

A trust can only be modified by the settlor who:
1. expressly reserved the power the modify the trust OR
2. has the power to revoke or amend the trust.

Question 28

Modification: minority view

Answer 28

Settlor is free to amend or revoke a trust unless the trust states otherwise.

Question 29

Modification: UTC

Answer 29

A trust may be modified in the following instances:
1. by the settlor (unless trust states otherwise)
2. if settlor had beneficiaries consent
3. the beneficiaries’ consent + modification is not inconsistent with the trust purpose
4. it will further the trust purpose because of unanticipated circumstances
5. the cy pres doctrine applies
6. the court determines the value of the trust is insufficient to justify its administration + notice to all beneficiaries, OR
7. its necessary to conform the trust to the settlor’s intent

Dispositive provisions can be modified when circumstances arise that were not anticipated by the settlor.

Question 30

Modification: Equitable deviation doctrine

Answer 30

A court may modify the terms of the trust if
a. continuing the trust is impractical or wasteful, AND
b. the modification furthers the trust purpose because of unanticipated circumstances

Question 31

Modification: Common law

Answer 31

only administrative provisions may be modified

Question 32

Additions clause

Answer 32

Gives a trustee the specific power to accept or reject additions to the trust property from a settlor or any other person.

Question 33

Termination of a trust: UTC

Answer 33

Under the UTC, a trust may be termination if:
a. its revoked or expires pursuant to the terms;
b. its material purpose is achieved;
c. it becomes unlawful, contrary to public policy, or impossible to achieve;
d. the settlor and all beneficiary’s consent;
e. all beneficiaries consent and a court decides its continuation is not necessary to achieve any trust purpose
f. termination will further the purpose of the trust because of unexpected circumstances,
g. the cy pres doctrine applies, or
h. the value of the trust is insufficient to justify the cost of adminstration

Question 34

Distribution upon termination

Answer 34

Upon termination, the trustee shall proceed expeditiously to distribute the trust property.

Trustee may retain a reasonable reserve to pay trust debts, expenses, and taxes

The beneficiaries may decide how trust property is distributed if the trust is terminated by grounds settlor & beneficiary consent or Beneficiary & court consent.

Question 35

Conditions that prohibit marriage / require divorce

Answer 35

Provisions prohibiting further marriage or requiring a divorce are void against public policy.

Will be treated as if the restriction was not imposed.

Question 36

Valid restraint on marriage

Answer 36

Restraint on remarriage OR purpose to take care of a person’s daily needs until they are able to obtain such support to the marriage

Question 37

Duty to administer the trust:

Answer 37

A trustee must continue to administer the trust until it terminates

Common law: duty to act with care, skill, and prudence
UTC: good faith, in accordance with trust purpose and terms, and in the interests of beneficiaries

Must exercise all powers in good faith and in accordance with trust terms even if trustee is granted a broad range of discretion

Question 38

Duty of care

Answer 38

The duty of care includes the duty of prudent administration and the duty to take control & protect trust property.

Question 39

Duty of care: duty of prudent administration

Answer 39

trustee myst administer the trust as a prudent person would.
must exercise reasonable care, skill, and caution

Question 40

Duty of care: duty to take control & protect trust property

Answer 40

Trustee must take reasonable steps to take control and protect trust property (like obtain insurance)

Question 41

Duty of loyalty: Self-dealing

Answer 41

A trustee must administer the trust solely in the interests of the beneficiaries, and cannot engage in self dealing.

Question 42

If a trustee engages in self dealing

Answer 42

a. the transaction is voidable by the beneficiary affected or
b. the beneficiary can seek damages

Question 43

Five exceptions where self dealing is allowed

Answer 43

1. authorized in trust terms
2. approved by the court
3. beneficiary did not commence a judicial proceeding within the required time,
4. beneficiary consented, ratified, or released the trustee of liability
5. transaction occurred before the person became a trustee

Question 44

Duty of loyalty: conflict of interest

Answer 44

A transaction is presumed to be affected by a conflict of interest if entered into by:
a. trustee’s spouse
b. trustee’s descendants, siblings, parents, or their spouses,
c. agent or attorney of the trustee, OR
d. an entity that trustee has an interest in that might affect the trustee’s best judgment.

Question 45

No further inquiry rule

Answer 45

A transaction entered into by a trustee for the trustee’s own benefit is automatically presumed to be a conflict of interest.

it is voidable without further inquiry into fairness or good faith

For a person who has a close business or personal relationship with the trust, the presumption is rebuttable if the trustee shows the transaction was not affected by the conflict.

Question 46

Duty of loyalty: duty to act impartially

Answer 46

A trustee must act impartially giving due regard to the beneficiaries’ respective interests. A trustee cannot be influenced by personal favoritism or animosity.

Question 47

Duty of care: failure to test the market

Answer 47

A trustee breaches her duty of care when she fails to test the market for potential buyers

Question 48

Duty of care: investments & prudent investor rule

Answer 48

A trustee must exercise the degree of care, skill, and prudence of a reasonable investor investing his own property

Must diversify assets, avoid risky investments and keep trust assets productive.

Question 49

Delegation of trust duties:

Answer 49

a trustee may delegate duties and powers that prudent trustee would delegate under the circumstances

Question 50

If a trustee delegates a duty, he must exercise reasonable skill, care, and caution in:

Answer 50

1. selecting an agent
2. establishing the scope and terms of the delegation, AND
3. monitoring the agent’s performance and compliance.

A trustee is not liable for an agent’s actions if these steps are followed.

Question 51

Trustee acting in accordance with settlor’s wishes

Answer 51

Revocable trust: trustee owes duties only to the settlor (during settlor’s lifetime). Trustee is not liable for acting in accordance with the settlor’s wishes.

Irrevocable trust: trustee owes duties to the settlor and the beneficiaries. Trustee may be liable for acting in accordance with the settlor’s wishes, if its to the exclusion of the beneficiaries.

Question 52

Principal and income allocations

Answer 52

Trust receipts and disbursements are allocated to either principal or income.
State law normally controls how each is allocated.

Question 53

Allocated to income

Answer 53

1. receipt of rental payments
2. money received from an entity (cash dividends, interest on investments)
3. ordinary expenses and repairs

Question 54

Allocated to principal

Answer 54

1. proceeds from the sale of a principal assets
2. all other property received- other than money received from an entity
   and 3. extraordinary expenses and repairs

Question 55

Damages for wrongful invasion of trust assets

Answer 55

A trustee who wrongfully invades trust assets is liable for the greater of:
a. the amount required to restore the value of trust property and distributions, OR
b. any profit made by the trustee from the breach.

Question 56

Remainder beneficiary of a trust (remaindermen)

Answer 56

not entitled to receive trust property until termination of the trust

Question 57

Representation of remaindermen

Answer 57

A minor, incapacitated, or unborn person MAY be represented by a person with a substantially identical interest unless
a. already represented; or
b. a conflict of interest exists.

Question 58

Substituted takers

Answer 58

A substitute gift is created in the deceased beneficiary’s surviving descendants if:
a. the beneficiary of a future interest does not survive the distribution date; and
b. an anti-lapse statute applies.

In most states, anti-lapse statutes do not apply to trusts

Question 59

Substituted takers (UPC)

Answer 59

If a beneficiary of a future interest does not survive the distribution date, the following applies:
- if a gift is not a class gift, a substitute gift is created in the surviving descendants
- if a gift is a single generation class gift (“children”) a substitute gift is created in the surviving descendants of any deceased beneficiary

Question 60

Vested remainder

Answer 60

an interest where there are no contingencies or conditions on survivorship.

• pass to that person heirs if the person dies before the interest becomes possessory
• are devisable

Question 61

Vested remainder: Common law

Answer 61

If a remainder person dies before a life tenant, a vested remainder interest will pass to the remainder person’s heirs. If no heirs, the interest passes to the person’s estate.

Unless a survival provision is in the trust

Question 62

Vested interests: conditions on survivorship

Answer 62

common law; a condition of survivorship on future interests in a trust is not implied
UPC: such condition is implied

Question 63

Acceleration of future interests

Answer 63

a future remainder interest may be accelerated (take possession immediately) if the present holder:
a. loses his legal right to the property. OR
b. disclaims his interest (unless the distribution would harm a beneficiary/potential beneficiary or the trust terms limit acceleration)

Question 64

Powers of appointment

Answer 64

When a testator/settlor gives another person the power to decide where and to whom the property will go

donor: testator/settlor
Donee: person who has power of appointment

Question 65

General power of appointment

Answer 65

when a donor leaves no conditions or restrictions for the appointment of property

Question 66

testamentary power of appointment

Answer 66

can only be exercised in a donee’s will and according to donor’s conditins

Question 67

Exercising a power of appointment

Answer 67

the power is effectively exercise in an instrument only if
a. the instrument is valid under state law,
b. an intent to exercise the power and its consistent with any conditions, and
c. the appointment is permissible (its to a person/group authorized by the donor).

Exercise of power in a general residuary clause: in most states, is not exercised unless the donee’s intent to exercise the power is referenced.

UPC: expresses intent to exercise the power only if
a. the will manifests intent to include the property subject to the power, OR
b. the power is a general power and the creating instrument does not contain a gift if the power is not exercised.

Finding intent in a blanket exercise clause;
most states: intent to exercise a power is presumed with a blanket exercise clause
some states & UPC: if donor required the power to be exercised by an express/specific reference, a blanket exercise clause is not sufficient to show intent

Question 68

Special power of appointment

Answer 68

The donee may appoint power only to those limited persons/groups authorized by the donor
Donee cannot appoint property to himself, his estate, his creditors, or his estate’s creditors

Question 69

Ineffective appointments

Answer 69

Appointments to non-authorized persons/groups are deemed ineffective

if more than one appointment is made, the ineffective appointment will not affect other valid appointments.
ineffective appointments pass to the taker in default
if no taker in default, the property passes to the donee or the donee’s estate

Question 70

Rule against perpetuities

Answer 70

under the common law, a gift must vest within a life in being at the time of the grant plus 21 years.

Invalidates any gift that will not actually vest or hypothetically vest within that time period.

A class gift vests under RAP when the class closes AND all conditions for every member of the class are satisfied.

Question 71

Modern modifications to RAP

Answer 71

wait and see approach: a gift is valid if it actually vests within 21 years after the death of a life in being at the time the interest was created. The court waits to see if the interest will actually not vest.

reduction of age contingencies: by statute, any age contingency that violates the rule is reduced to 21 years