Pg 31

Question 1

What is involved in the type of trust that involves discretion guided by standards?

Answer 1

The trustee has discretion for making distributions but the terms provide limits or guidelines for how to exercise discretion. The beneficiaries are only in line to get money from the trust if and when the trustee decides.

Question 2

What is an example of language of the type of trust that is discretion guided by standards?

Answer 2

“The trustee will pay the beneficiary income in the amount and at the time that the Trustee deems prudent for the beneficiary’s support.” If the res is $100,000 earning 10% per year, if the trustee doesn’t pay out $10,000 per year, the beneficiary cannot sue unless he can show that the trustee was acting inconsistent with the standard of providing for the beneficiary’s support. If the Trustee was only providing $5000 a year and the beneficiary needs $8000 to cover rent and expenses, he could compel additional expenses.

Question 3

If a discretionary trust is set up for the beneficiary’s support, what is the obligation that the trustee has with regard to discovering other sources of income for the beneficiary?

Answer 3

• restatement: must discover and consider other sources of income to the beneficiary in order to figure out what is needed for the trust for support.
• UTC: no obligation to do this

Question 4

If a discretionary trust guided by standards is in place that says that the trust funds must be used “to sustain the beneficiary according to the manner he is accustomed to,” what does the testator need to find out?

Answer 4

About the beneficiary’s station in life in order for him to provide sufficient funds

Question 5

What is involved in a trust that gives absolute or pure discretion to the trustee?

Answer 5

The language of the trust gives the trustee nearly unlimited discretion for how to make transfers to the beneficiary and when. But the trustee must still use discretion in good faith, and if he doesn’t, he’s liable for abusing his discretion.

Question 6

What is an example of an absolute or pure discretionary trust?

Answer 6

“Trustee will pay beneficiary income or principal in whatever amount and at whatever time the trustee deems proper in his absolute discretion.“ If the trustee pays the beneficiary nothing for three years, that is OK as long as there is a legitimate reason why and the trustee used good-faith discretion. If a trustee doesn’t pay anything out of spite, that is bad faith and the beneficiary can compel payment,

Question 7

What is the rationale behind trust that involve absolute or pure discretion in the trustee?

Answer 7

The beneficiary doesn’t have a property interest to transfer or be attached and the beneficiary has no power to compel payment

Question 8

What are the duties that a trustee owes to successive beneficiaries?

Answer 8

The trustee must act in the best interest of all the beneficiaries and cannot unduly benefit one at the expense of another unless the trust expressly says so.

Question 9

What are the only things that life income beneficiaries are concerned about?

Answer 9

The trustee investing trust property in something with a higher rate of return, because they only get income from trust property, not the principal itself

Question 10

What is the only thing that a remainderman beneficiary is concerned about with regard to the trustee?

Answer 10

Maximizing principle and avoiding depreciation, but not with immediate income

Question 11

If a settlor sets up a trust that says that a trustee must invest trust assets and pay income annually to A for life [his spouse], then principle is paid in a lump sum to B “[his child]. If the trust property is $100,000, and the trustee put it in a savings account, what will happen?

Answer 11

The principal will stay intact [which is good for the remainderman] but will make almost no income [which is bad for the life income beneficiary], so he can sue.

Question 12

Is it possible for a settlor to draft around the principle that a trustee cannot favor one beneficiary over another?

Answer 12

Yes. If the settlor’s primary goal is to provide for the life income beneficiary, he can prevent a claim by the remainderman by specifying what the primary purpose of the trust is. Then the court considers the trustee’s actions in light of the specifications. The trustee can prioritize according to the trust language when it calls for unequal treatment.

Question 13

What is the first thing to look at with regard to creditor rights?

Answer 13

Whether the person actually has rights to the property before the creditor can try to claim against it to satisfy a debt.

Question 14

What is the main rule with regard to creditor rights?

Answer 14

Creditors do not have greater rights to the property than the debtor has, so the rights that creditors have to trust property depends on what rights the beneficiaries of the trust have.

Question 15

If the settlor of a revocable trust owes Visa $5000, but has a revocable trust set up for the beneficiary and puts $10,000 into the trust, what happens?

Answer 15

Revocable trusts involve the settlor having control over the property until his death, so that property is the settlor’s property, so the trustee only owes duties to the settlor, not to the beneficiary, so the settlor’s creditors can attach the trust property.

Question 16

What are the creditors of a settlor’s rights with regard to an irrevocable trust?

Answer 16

Creditors cannot attach the trust res because the settlor has given up meaningful control to the property, so he doesn’t own it, and his creditors do not have greater rights than he has to the property. But if he set up the irrevocable trust for his own benefit, then he still has equitable title, so then the creditors can attach the trust property

Question 17

What rights do a trustee’s creditors have with regard to the trust property?

Answer 17

His creditors do not have greater rights to the property than he does, so they cannot satisfy his debt out of the trust as long as he can show that the property isn’t actually his. If he commingled the property with his own money and the creditors can get it, then he would be personally liable to the settlor and the beneficiary for not protecting and preserving the trust

Question 18

What are the rights of a beneficiary’s creditors with regard to a mandatory trust?

Answer 18

Since the beneficiary has a concrete property interest in the res, the creditor can attach it too. Ie: if the beneficiary owes $5000 to MasterCard and is the beneficiary of a trust that says he gets $1000 a month, MasterCard can get a court order directing the trustee to make the next five payments directly to MasterCard until the debt is paid, then normal payments would resume to the beneficiary.

Question 19

What are the rights of a beneficiary’s creditors with regard to discretionary trust property?

Answer 19

Since the beneficiary cannot compel payments unless he shows abuse of discretion, the creditor cannot either, so he cannot compel the trustee to make a payment directly to him. But if or when a distribution is made to the beneficiary, the creditor can collect from the beneficiary, since that property becomes part of the beneficiary’s assets at that point. This makes the trust available to the beneficiary, but not to his creditors.

Question 20

What are the two different kinds of discretionary trust?

Answer 20

Pure discretionary and support trust

Question 21

What is the difference with regard to the trustee’s discretion when dealing with a pure discretionary trust and a support trust?

Answer 21

– pure discretionary trust: the trustee has absolute discretion over distributions to the beneficiary
– support trust: the trustee is required to make distributions as necessary for the beneficiary’s education or support

Question 22

What is the reason that creditors of a beneficiary cannot compel payments to them with regard to a discretionary trust?

Answer 22

The creditor’s rights are no greater than the beneficiary’s rights and since the beneficiary cannot compel payments, neither can the creditors.

Question 23

What is a spendthrift trust?

Answer 23

This is a trust to insulate the trust property from the beneficiary’s creditors because the beneficiary cannot voluntarily alienate or transfer his interest in the trust AND creditors cannot attach his interest

Question 24

What is the rationale behind spendthrift trusts?

Answer 24

The seller decides what to do with his property. He doesn’t want to make a gift that goes straight to the beneficiary’s creditors. If the beneficiary is known to squander money, the seller doesn’t want his money to disappear to satisfy the beneficiary’s debts, so he includes a provision that says that the beneficiary’s creditors cannot touch the money, and the beneficiary is prohibited from selling or gifting his interest in the trust