MEE - Trusts

Question 1

Creation of trust

Answer 1

1/ Capacity to create a trust
2/ Intent to create a trust
3/ Appoint competent trustee (but court will appoint one if none appointed)
4/ Trust must have definitely ascertainable beneficiaries
5/ A trust must have property

Question 2

Trust without property

Answer 2

Not invalid but refreshes anew when settlor adds property and declares intention anew

Question 3

Pour over provision

Answer 3

A pour over provision will provide property to a trust, including an initially invalid trust that lacks property, as long as the trust is established during testator’s lifetime (i.e. trust is created during life of testator and gets property during life of testator even if at the time of the will the trust had no property)

Question 4

Inter vivos and testamentary trusts

Answer 4

A trust can be created during a lifetime - usually in writing but can be created verbally with clear and convincing evidence.

A trust can be created via a will - a testamentary trust, the will can identify beneficiaries via a power of appointment/ incorporation of some external document

Question 5

Powers of trustee

Answer 5

The trustee has EXPRESS and IMPLIED powers to manage, invest and distribute trust assets

Question 6

Powers of discretionary trustee

Answer 6

A discretionary trustee has the power to exercise his or her duties in a manner they see fit. The trustee’s exercise of discretion can only be impugned if it is an abuse of discretion. Whether or not something is an abuse of discretion depends on the nature of the discretion conferred.

Generally, a court will not interfere unless a trustee has acted in bad faith or dishonestly.

Question 7

Duty to administer

Answer 7

The duty to administer the trust in good faith and according to trust terms

Question 8

Duty of good faith and honesty

Answer 8

The duty to discharge duties in good faith and honesty (preferring one beneficiary over another on the basis of political beliefs is acting in bad faith)

Question 9

Duty to act with loyalty and not self deal

Answer 9

The duty of loyalty means that a trustee cannot prefer his now interests over that of the trust or to prefer the interests of one beneficiary over another.

The duty of self dealing means that a trustee cannot engage in transactions with the trust either directly or indirectly. Note: always state that it does not matter that the transaction was beneficial to the trust

Question 10

Duties to settlor / sole beneficiary

Answer 10

If the settlor is the sole beneficiary of a revocable trust, the trustee can prefer his interests before the settlor dies

Question 11

Duty to report

Answer 11

Keep the beneficiaries reasonably informed of the trust and its administration

Question 12

Duty to keep records and keep trust property separate

Answer 12

Must keep records and keep trust property separate to own property or property of another trust

Question 13

Duty to defend and enforce claims

Answer 13

Must enforce and defend claims issued against the trust

Question 14

Duty to preserve the trust property & make it productive

Answer 14

A trustee has a duty to preserve and make the trust property productive via investments. Under the traditional approach, each investment was viewed in isolation. However, under the UPIA, the investments are viewed on a. group, global basis to determine whether they are prudent. Generally, under this standard, the trustee must DIVERSIFY the portfolio.

Factors to determine when determining whether an investment decision is prudent include:
1/ likely return
2/ requirements of beneficiaries - incl requirement for liquidity
3/ economic climate etc

Question 15

Duty to preserve trust property & make it productive (social investing)

Answer 15

Social investing may be permitted by the trust deed, if it is not permitted by the trust deed but the trustee embarks on it, the trustee may need to prove that the the social investment garnered the same returns as non social investment

Question 16

Remedies & standing

Answer 16

A beneficiary can sue the trustee or a third party that has caused loss to the trust 9where the trustee is unwilling to do so).

The remedies available for the breach of trust include:
Specific performance
Injunction
Constructive trust (but if it affirms may need to account for expenses / clean hands)

Question 17

Removal of trustee

Answer 17

A trustee can be removed if they are uncooperative, commit a serious breach of duties, has serious conflict, fails to report etc

Question 18

Defences

Answer 18

A trustee can rely on the following defences:
1/ Balancing competing trust terms
2/ Beneficiaries have consented to the act
3/ Reliance on exculpatory clause - however not effective where they exclude liability for a/ bad faith b/ reckless indifference c/ where clause was obtained via collusion between settlor and trustee
4/ Delegation of duties (but note discretionary duties cannot be delegated & when you delegate have to make regular and sufficient inquiries as to progress)

Question 19

Discretionary support trusts

Answer 19

“In the trustee’s direction for the comfort and happiness of X.”

Although the courts are more likely to intervene in discretionary support trusts, beneficiary cannot compel the trustee to exercise its discretion in the absence of bad faith and dishonesty.

Creditors? Limited in access to what the beneficiary has, which is a right subject to the trustee’s discretion.

Question 20

Discretionary trusts

Answer 20

Discretionary trusts exist where the trustee has absolute power and discretion to make decisions . The beneficiaries have not right to income until the trustee exercises the right.

Creditors? The creditors cannot reach trust assets because it is unclear what (if anything) the beneficiary has, until the trustee exercises their discretion. The trustee can be served with a process by the creditors and compelled to pay any future distributions to them in lieu of the beneficiary

Question 21

Spendthrift trusts

Answer 21

“To myself and my daughter Dawn; neither of our creditors can reach the assets and we cannot dispose of or sell or transfer our interests.”

Designed to protect the beneficiary, beneficiary cannot sell or dispose of interest either voluntarily or non voluntarily. If the beneficiary is also the settlor, the provision is invalid and the creditors of that settlor-beneficiary can reach the trust

Question 22

Charitable trust - creation

Answer 22

A charitable trust is a trust that benefits the public at large / an indefinite set of beneficiaries and which has a objectively-ascertained charitable purpose

Question 23

Charitable trust - indefinite set of beneficiaries?

Answer 23

The trust has to cover an indefinite set of beneficiaries. Can be a trust for a legal purpose (i.e. reforming a law) but not for a political party.

Generally, the test will be satisfied if the beneficiaries are changing over time and are indefinite

Question 24

Charitable trusts - Modification / Cy Près

Answer 24

A trust may be revoked where the existing purpose cannot be fulfilled - it will go back to the settlor’s estate or residuary / intestacy where the trust coms from a will.

However, where the settlor had a general charitable intent, the courts will strain to save the gift by applying the gift to a similar charitable purpose

Question 25

Charitable trusts - standing

Answer 25

Any beneficiary, the named charity and the state attorney general all have standing in respect of charitable trust matters

Question 26

Termination of trust by law

Answer 26

Where the trust terms expire, where purpose has been accomplished (all property distributed, the legal and equitable titles merged, or it has become illegal or contrary to public policy to carry out trust terms).

Question 27

Revocation / amendment by settlor

Answer 27

A settlor can revoke or modify a trust unless the terms expressly prohibit modification or revocation

Question 28

Modification by beneficiaries (consent of settlor)

Answer 28

Beneficiaries can modify the terms of the trust with the consent of the settlor

Question 29

Revocation or modification by beneficiaries (without consent of the settlor)

Answer 29

The beneficiaries can revoke or modify the trust without the consent of the settlor where:
1/ all beneficiaries agree (and if some are not alive / representation will need to be appointed)
2/ doing so would not frustrate a material purpose of the trust

Question 30

Revocation or modification by court

Answer 30

A court may modify the terms of the trust instrument (even by going against the express terms of the trust) if there has been a change in circumstances which the settlor did not foresee which substantially impair the trusts purpose

Question 31

Termination of trust

Answer 31

A court can terminate the trust if its continuation would be wasteful / impracticable / agains the law or public policy

Question 32

RAP & Wait and see rule

Answer 32

A gift that will not vest within 21 years from a life in being offends the Rule Against Perpetuities and will be void (resulting back to the trust / estate / residuary).

There are some modifications to the RAP. The “wait and see” rule enables the court to wait and see what events have actually unfolded before declaring a gift void – the goal is to “wait out” the perpetuities period before declaring a gift void.