MEE Trusts and Future Interests

Question 1

Def.: Support Trust

Answer 1

A trust where the trustee is required to pay or apply as much of the trust is necessary for the support of the beneficiary.

The trustee does not have discretion to refuse to pay bills necessary for the beneficiary’s support.

Question 2

Def.: Discretionary Trust

Answer 2

The trustee is given discretion whether to apply or withhold payment of trust property to the beneficiary.

This discretion limits the beneficiary’s rights to the amounts the trustee decides to give them.

Question 3

In a discretionary trust, when can a beneficiary interfere with the exercise of trustee’s discretion?

Answer 3

ONLY if the trustee abuses their power - and what constitutes abuse depends on the extend of the discretion conferred on the trustee.

Typically, a showing that the trustee acted in bad faith or dishonestly is required.

Question 4

Under what circumstances do most jurisdictions permit the termination of a trust by its beneficiaries?

Answer 4

2 things are required:

1. All beneficiaries consent to the termination
2. Any modification will not interfere with a material purpose of the trust

Question 5

May a Guardian consent to the termination of a trust on behalf of any unborn beneficiaries?

Answer 5

Maj. approach: not allowed

UPC: okay to do

Question 6

3 Trustee Fiduciary Duties (generally)

Answer 6

1. must deal with the property with reasonable care;
2. must maintain the utmost degree of loyalty; and
3. is personally responsible if their conduct falls beneath required standards

Question 7

5 Elements of a Valid Trust

Answer 7

1. intent: (i) settlor intends to split legal and equitable title AND (ii) settlor imposes enforceable duties on holder of legal title
2. identifiable corpus: any trust property must be ascertainable with certainty (no property, no trust, it fails)
3. ascertainable beneficiaries (necessary for all trusts except charitable and honorary trusts)
4. proper purpose (may create for any purpose, but purpose = invalid if illegal, contrary to public policy, impossible to achieve, or intended to defraud settlor’s creditors or based on illegal consideration)
5. mechanics and formalities

Question 8

5 Elements Required for an Express Trust per the UTC

Answer 8

1. settlor with capacity to convey
2. a present intent to create a trust relationship
3. a competent trustee with duties
4. a definite beneficiary
5. the same person is not the sole trustee AND sole beneficiary

+ must have a present disposition in trust of specific property then owned by settlor and the trust have a valid purpose

(-) consideration is NOT required

Question 9

True or False: A settlor’s intent must be for the trust to take effect immediately.

Answer 9

True; a promise to create a trust in the future is not enforceable unless the promise results in a binding contract (i.e., + consideration)

Question 10

What is “precatory language” and how can it be overcome?

Answer 10

Precatory language is a settlor’s expression of a hope, wish, or mere suggestion that property be used in a certain way → does NOT create a trust

Can be overcome by evidence of any of the following:

• definite and precise directions
• directions addressed to a fiduciary
• a resulting “unnatural disposition” of property (i.e., close relative will otherwise take nothing) if no trust is imposed
• extrinsic evidence showing settlor previously supported the intended beneficiary

Question 11

What is a Qualified Beneficiary?

Answer 11

a beneficiary who, on the date of the beneficiary’s qualification is determined, is

(1) a current beneficiary, OR
(2) a first-line remainder-man (one who will become eligible to receive distributions were the event triggering the termination of a beneficiary’s interest or of the trust itself to occur on the qualification date)

Question 12

How and when does a beneficiary “disclaim” an interest in trust? And when are they estopped from doing this?

Answer 12

How: file a written instrument with the trustee (or if created via will, w/ the probate court)

When: usually w/in 9 months of the interest’s creation; or if you are under 21, w/in 9 months of turning 21

Estoppel: if the beneficiary has exercised any dominion or control over the interest OR accepted any benefits under the trust, they are estopped from disclaimer

Question 13

3 Methods of Accepting a Trusteeship:

Answer 13

1. signing the trust or a separate written acceptance;
2. substantially complying with the acceptance terms in the trust instrument; OR
3. accepting delivery of trust property, exercising powers or performing duties as trustee, or indicating acceptance

Question 14

When May a Court Remove a Trustee?

Answer 14

Grounds for removal include:

1. a serious breach of trust;
2. serious lack of cooperation among co-trustees;
3. unfitness, unwillingness, or persistent failure to administer; OR
4. a substantial change in circumstances

*overall general idea → whether continuation in office would be detrimental to the trust

Question 15

What are “Secret” and “Semi-Secret” Trusts?

Answer 15

“Secret” trust: when the settlor and a will beneficiary agree that the beneficiary will hold certain property in trust for someone else—and relies on this agreement—but the will does NOT state the trust nature of the gift → if not done, promise/agreement must be proven by clear and convincing evidence (extrinsic evidence permissible) to create the “constructive trust” to be imposed on the property in favor of the intended trust beneficiary

“Semi-Secret” trust: where a will makes a gift in trust BUT fails to name the beneficiary - the gift FAILS and named trustee holds the property on a resulting trust for testator’s successors in interest → extrinsic evidence is NOT allowed

Question 16

What is a “Spendthrift Trust”

Answer 16

This type of trust precludes the beneficiary from voluntarily, or involuntarily, transferring their interest in the trust, AND the beneficiary’s creditors are prohibited from reaching it to satisfy any of beneficiary’s debts

BUT (1) judgment or court orders for support or maintenance of the beneficiary’s child, spouse, or former spouse AND (2) claims by the government can still reach a spendthrift trust.

*NOTE: a settlor cannot use a spendthrift trust to protect their own property from their own creditors BUT a growing number of states are beginning to allow this…

Question 17

Trust Termination: Generally & By Operation of Law

Answer 17

A trust terminates automatically when:

(1) the terms specified in the instrument expire; or
(2) when all of the purposes of the trust have been accomplished or have become unlawful, contrary to public policy, or impossible to achieve

A trust terminates by operation of law when either:

(1) the property has been exhausted; OR
(2) the legal and equitable titles merged (same person is both trustee and beneficiary)

Question 18

Trust Termination: By the Settlor? By the Beneficiaries?

Answer 18

Settlor:

• UTC → settlor may revoke or amend a trust unless terms expressly state it is irrevocable
• Traditional rule (that some UTC states follow regardless) → trust is irrevocable unless settlor expressly reserves the power to revoke or modify

Beneficiaries: [where material purposes = support and spendthrift provisions; payment at certain ages and dates; and discretionary trusts]

• Want to change a material purpose of the trust? Req’s consent of all beneficiaries + settlor’s consent
  
  • THIS INCLUDES ALL UNBORN AND UNASCERTAINED BENEFICIARIES + BENEFICIARIES OF FUTURE INTERESTS - a party is appointed to represent these
• Only change non-material purposes of the trust? Req’s just consent of all beneficiaries

AND → if all beneficiaries agree, trustee must distribute property as agreed; and if terminated, trustee is no longer liable if the trustee accommodates them by distributing trust assets where termination may violate a material purpose of the trust

Question 19

When may a Trustee terminate a trust?

Answer 19

Some states → if trust property < $50K and the amount is thus insufficient to justify the cost of administration + Trustee provides notice to beneficiaries

WO: Trustees can combine several trusts or divide one trust up as long as doing so doesn’t frustrate any purposes of the trusts or impair beneficiary rights → no notice to beneficiaries is required

Question 20

6 Trustee Duties

Answer 20

1. duty to administer trust [in good faith and in a prudent manner in accordance with trust terms and purposes]
   
   1. includes duty to personally administer the trust
      
      1. Traditionally, trustee could NOT delegate
      2. Modern view, trustee may delegate investment and management functions that a prudent trustee of comparable skills could properly delegate under the circumstances → BUT must exercise reasonable care, skill, and caution in selecting agent, establishing scope of delegation, and periodically reviewing agent’s actions to monitor their performance and compliance with terms of delegation
         
         1. CANNOT DELEGATE DISCRETIONARY CAPABILITIES
2. duty of loyalty [no self-dealing, can’t buy/sell trust assets, borrow trust funds, etc.]
3. duty to report [give benef.’s trustee’s contact info; respond to requests for trust info from benef.s; furnish annual accounting of trust]
4. duty to separate trust property and keep records – no commingling [must also “earmark” trust property by labeling it as trust]
5. duty to enforce claims and defend trust from attack
6. duty to preserve trust property and make it productive

Question 21

What is the “prudent investor rule” and what phrases in a trust instrument invoke this?

Answer 21

R: trustee must exercise reasonable care, skill, and caution when investing and managing trust assets; AND investment decisions must be viewed as an entire “portfolio/investment strategy” rather than as individual investments

phrases: “prudent person rule”; “prudent man rule”; “legal investments”

Question 22

4 Remedies for a Breach of Trust (Trustee):

Answer 22

1. enforce specific performance of trustee’s duties;
2. enjoin trustee from committing breach of trust;
3. compel trustee to pay $ or restore property; OR
4. suspend or remove trustee

Question 23

Trustee’s Liability to 3rd Parties?

Answer 23

Generally, trustee may be sued on the K in the trustee’s fiduciary capacity

*B/c → a trust isn’t a legal entity

A 3rd party can only sue trustee personally if trustee, in entering K, failed to reveal the fiduciary relationship either by indicating their role as trustee in their signature or by referring to the trust

+ If K was properly entered into, trustee is entitled to indemnification or reimbursement from trust property

Question 24

What is the “cy pres” doctrine, and when is it applied?

Answer 24

When a charitable purpose selected by settlor is impracticable, unlawful, impossible to achieve, or wasteful, the court may select an alternative under the doctrine of cy pres, which means “as close as possible” by ascertaining the settlor’s primary purpose

Traditional approach: only applied if court can determine settlor had a general charitable intent + may look to extrinsic evidence

UTC: this intent is conclusively presumed unless terms expressly provide otherwise

Question 25

3 Circumstances where a Resulting Trust arises?

Answer 25

1. purchase $ resulting trust [presumed when A gives consideration for real/personal property but A consents to title being taken in the name of B]
2. when an express trust fails [occurs when (i) trust is void or unenforceable, (ii) benef. is dead or cannot be located, or (iii) charitable trust fails and cy pres is inapplicable]
3. results from an incomplete disposition of trust assets (“excess corpus”) [no word on what to do with excess]

Question 26

Def.: Constructive Trust

Answer 26

A constructive trust = a flexible, equitable remedy to prevent unjust enrichment resulting from wrongful conduct (i.e., fraud, undue influence, breach if fid. duties)

• must be pleaded b/c is a remedy only court can grant
• requires clear and convincing evidence
• must be able to identify particular property as the trust property

Question 27

If settlor has the power to revoke, what does this often include?

Answer 27

The power to amend the trust → UTC provides that if settlor can revoke, they can also amend

BUT → CL requires settlor to reserve power in trust agreement

Question 28

Def.: Pour-Over Gift

Answer 28

A pour-over gift is a testamentary gift to a trust created during testator’s lifetime with testamentary assets to be administered and distributed as part of that trust

+ these are valid even if the trust is unfunded during testator’s lifetime AND even if trust is amended prior to testator’s death

Question 29

What does the UPIA require, generally, re: a trustee’s investment responsibilities?

Answer 29

1. invest & manage trust assets as a prudent investor would, taking the trust purpose, terms, distribution requirements, and other circumstances into account
2. “acting prudently” = exercising reasonable care, skill & caution
3. prudence is evaluated as to the overall portfolio as trustee has a duty to diversify investments (unless there are special circumstances indicating the trust purposes would be better served w/o diversification); AND
4. trustee must act for beneficiary’s benefit; if >1 beneficiary, must act impartially in managing trust assets taking into account the beneficiaries’ differing interests

Question 30

Def.: Rule of Convenience

Answer 30

when a will makes a class gift but postpones possession and enjoyment of the gift, the class closes at the fixed time for distribution

Question 31

Under the UTC, when can a Court modify a trust without the full consent of beneficiaries?

Answer 31

ONLY IF:

1. trust could have been terminated had all of them consented; AND
2. the non-consenting beneficiary’s interest will be adequately protected