Modification and Termination of Trusts

Question 1

When is it appropriate for trustees and/or beneficiaries to modify the trust?

Answer 1

Only when all the beneficiaries consent and objectives of the trust would be defeated/substantially impaired if the trust was not modified

Question 2

What is the Claflin Doctrine?

Answer 2

The idea that the material purpose of the trust comes first, overriding any specific directions in the trust.

Question 3

J, the newspaper publisher, established a trust to provide income to his wife, children, and grandchildren. He directed the trustee to keep and not sell the principal true asset, stock in his newspaper. Over the years, losses in the newspaper resulted in virtually no income. Trustee petitioned the court to let him sell the stock as to provide more income to the family. Can trustee sell the stock?

Answer 3

Yes, b/c the primary material purpose was to provide income to J’s family.

Question 4

What is the two level modification test?

Answer 4

1. Find out the material purpose of the settlor regarding the trust purposes
2. Look for specific directions in the trust instrument to determine whether, because of changes in circumstances, those specific directions now FRUSTRATE the material purpose.
   IF YES, then with unanimous consent of beneficiaries, court should allow modification

Question 5

How can a settlor terminate a will?

Answer 5

In IL: trusts are hard to terminate; they are irrevocable and unamendable unless the power to revoke and amend is expressly reserved in the trust instrument.

Question 6

What are the Trustee’s powers?

Answer 6

1. Powers can be exercised pursuant to terms of trust, statute, or court decree
2. Can basically do anything, like:
   sell any real or personal property
   mortgage property
   lease property
   make ordinary repairs
   contest compromise or
   settle claims

Question 7

What can a Trustee NOT do?

Answer 7

1. Can’t engage in self-dealing
2. Can’t borrow money from the trust
3. Can’t continue a business without court approval

Question 8

What if a trustee continues a business without court approval?

Answer 8

Trustee is liable for losses incurred by the business (unless there are 3+ trustees, then dissenting trustee not liable)

Question 9

What are the 5 self-dealing prohibitions?

Answer 9

1. Trustee cannot but or sell trust assets to himself
2. Trustee cannot borrow trust funds
3. Trustee cannot lend money to the trust
4. Trustee cannot profit from serving as trustee
5. Corporate trustee cannot buy its own stock as a trust investment

Question 10

What are the two affirmative duties on self-dealing?

Answer 10

1. Duty to segregate trust assets from personal assets

2. Duty to earmark assets by titling them in trustee’s name

Question 11

What is the remedy for violation of the duty to segregate Trust/personal assets?

Answer 11

1. If commingled funds are used to buy an asset and asset goes down in value, conclusive presumption that personal funds were used
2. If the asset goes up in value, there is a conclusive presumption that trust funds were used.

Question 12

What are the remedies for breach of trustee’s fiduciary duties?

Answer 12

1. Beneficiary can sue to remove the trustee
2. Beneficiary can ratify the transaction and waive the breach
3. B can sue for any loss

Question 13

What is an action to recover losses to the trust called?

Answer 13

Surcharge action

Question 14

What is the no further inquiry rule?

Answer 14

Breach of a fiduciary duty by engaging in self-dealing is an automatic wrong and no further inquiry need be made

Question 15

Are there any defenses to breaches of fiduciary duty?

Answer 15

NO. Good faith or reasonableness are NOT defenses.

Question 16

Can the beneficiary sue a third party if a trustee engages in a prohibited transaction?

Answer 16

NO, not if the purchaser was a BonaFide Purchaser

Question 17

A testamentary trust named T as trustee. T borrowed $250,000 from the trust, giving the trust a six month note at 10% interest. The then prevailing bank rate was 9%. T took the money and bought real estate property for $250,000, and six months later sold the property for $300,000. What the transaction by T acceptable?
Can Benif. sue purchaser?

Answer 17

No, not acceptable action by trustee, can’t sue purchaser if she was a BFP

Question 18

Who is NOT a bonafide purchaser?

Answer 18

Purchaser who does know she was dealing with a trustee AND the trustee was engaged in self-dealing

Question 19

What is indirect self-dealing?

Answer 19

applies when the loans or sales to a relative of a trustee or to a business is a part of, self dealing rules apply.

Question 20

What are exculpatory cluases?

Answer 20

These are clauses that attempt to relieve a trustee of liability for a breach of a fiduciary duty

Question 21

Can exculpatory clauses be used to shield a trustee from ALL liability?

Answer 21

NO. This goes against public policy

Question 22

What are some acts of a trustee that CANNOT be shielded by an exculpatory clause?

Answer 22

Bad faith
Intentional breach of trust
Recklessness
Abuse of a confidential relationship