Top MEE Rules

Question 1

Parties to a trust

Answer 1

Grantor/Settlor—the creator of the trust.

Trustee—holds legal interest or title to trust property.

Beneficiaries—receive the benefit of the trust.

Income Beneficiaries—receive income from the trust (e.g., profits from a business held by the trust).

Remainder Beneficiaries—entitled to the trust principal upon termination of the trust. A vested remainder accelerates into possession as soon as the preceding estate ends for any reason, such as the death or disclaimer of the estate holder.

Creditors (Recently tested): A beneficiary’s creditors may reach trust principal or income only when such amounts become payable to the beneficiary or are subject to her demand.

Question 2

Creation of (private) express trusts (intent, property, purpose, beneficiaries) (13%)

Answer 2

A private express trust clearly states the intention of the settlor to transfer property to a trustee for the benefit of one or more ascertainable beneficiaries.

Intent. The settlor must intend to make a gift in trust. The settlor’s intent may be manifested orally, in writing, or by conduct.

Property. A valid trust must contain some property that was owned by the settlor at the time the trust was created and was at that time transferred to the trust or to the trustee. Any property interest, including real property, personal property, money, intangibles, partial interests, or future interests (whether vested or contingent) are sufficient.

Valid Purpose. A trust can be created for any purpose, as long as it is not illegal, restricted by rule of law or statute, or contrary to public policy (e.g. provisions that restrain a first marriage). Terms that violate public policy will be stricken from the trust; the trust will not fail overall unless the removal of the terms is fatal.

Ascertainable Beneficiaries. The beneficiaries must be identifiable so that the equitable interest can be transferred automatically by operation of law and directly benefit the person. The settlor may refer to outside writings or acts to identify beneficiaries. Exceptions:

Unborn children: Trusts for the benefit of unborn children are valid, even though the beneficiaries are not yet ascertainable at the time the trust is created.

Class Gifts: Trusts for a reasonably definite class (such as “my brothers”, or “my grandchildren”) will be upheld. Additionally, a trustee can select a beneficiary from an indefinite class (such as “my friends”), unless the trustee must distribute equally to all members of the indefinite class (not valid).

Charitable trusts (trusts that exist for the good of the public at large) must not have individual ascertainable beneficiaries.

Question 3

Judicial modification/termination of trusts (13%)

Answer 3

[MNEMONIC: Ur (honor) Ultimates And Modifies Trusts]

A court may modify OR terminate a trust due to:

Unanticipated Changes or Inability to Administer Trust Effectively. Because of circumstances not anticipated by the settlor, modification or termination will further the purposes of the trust. To the extent practicable, the modification must be made in accordance with the settlor’s probable intention.

Uneconomic Trust. The value of the trust property is insufficient to justify the cost of administration.

Modification only:

(a) Improve Administration. The court may modify the administrative terms of a trust if continuation of the trust on its existing terms would be impracticable or wasteful, or impair the trust’s administration.
(b) Correct Mistakes. The court may modify a trust to to conform the terms to the settlor’s intent, if it is proved by clear and convincing evidence that both the accomplishment of the settlor’s intent and the terms of the trust were affected by a mistake of fact or law, whether in expression or inducement.
(c) Tax Objectives. The court may modify a trust in order to achieve the settlor’s tax objectives. The court may require that the modification have a retroactive effect.

Consent of the beneficiaries is not required to effect these changes, but a beneficiary or trustee may commence a proceeding to approve or disapprove such changes.

Also, the court should take into account the testator’s intent/trust’s purpose with respect to both life interest holders and remainder interest holders.

Question 4

Rule Against Perpetuities (11.1%) (Themis: Not frequently tested)

Answer 4

Trusts are subject to the Rule Against Perpetuities. Therefore, a trust may fail if all interests thereunder may not vest within the applicable period of perpetuities (usually a life in being plus 21 years). Some jurisdictions take a “wait and see” approach to the application of the rule, refraining from invalidating future interests until it is clear that they will not vest within the perpetuities period.

Question 5

Revocable vs. irrevocable trusts

Answer 5

A revocable trust can be terminated by the settlor at any time. An irrevocable trust usually cannot be terminated.

Minority/Traditional: A trust is presumed to be irrevocable unless it expressly states otherwise.

Majority/Uniform Trust Code (UTC): A trust is presumed revocable unless it expressly states that it is irrevocable.

Question 6

Mandatory vs. discretionary trusts

Answer 6

A mandatory trust requires the trustee to distribute all trust income. In a discretionary trust, the trustee is given the power to distribute income at his discretion. The trustee does not abuse his discretion unless he acts dishonestly or in a way not contemplated by the trust creator.

Question 7

Types of private express trusts

Answer 7

Inter Vivos Trust. An inter vivos trust is a trust created while the trustor is living that transfers some or all of the trustor’s property into a trust. The trustor can designate himself or a third party as the trustee.

Pour-Over Provision: A pour-over is a provision in a will that directs the distribution of property to a trust upon the happening of an event, so that the property passes according to the terms of the trust without the necessity of the will reciting the entire trust.

(Recently Tested): A will may “pour over” estate assets into a trust, even if the trust instrument was not executed in accordance with the Statute of Wills, as long as the trust is identified in the will, and its terms are set forth in a written instrument.

A later amendment to the trust will apply to the assets passed to the trust by the previously executed pour-over will. The amendment does not have to be executed with formalities prescribed for the execution of a will. No witness or signature requirements!

Testamentary Trust. A testamentary trust is created in writing in a will or in a document incorporated by reference into a will. The will containing the trust must meet the attested or holographic will requirements.

Question 8

Charitable trusts

Answer 8

For a trust to be considered charitable, it must have a stated charitable purpose and it must exist for the benefit of the community at large or for a class of persons.

Charitable Purpose. Purposes considered to be charitable include the relief of poverty, the advancement of education or religion, and other purposes benefiting the community at large or a particular segment of the community.

Indefinite Beneficiaries. The community at large, or a class comprising unidentifiable members, not a named individual or a narrow group of individuals, must be the beneficiary of a charitable trust.

Rule Against Perpetuities. Charitable trusts are not subject to the Rule Against Perpetuities and may continue indefinitely.

Cy Pres Doctrine (Recently Tested). A court may modify a charitable trust to seek an alternative charitable purpose if the original one becomes illegal, impracticable, or impossible to perform. To determine whether it should modify the trust, a court will analyze whether the trust has a specific intent to help one charity or a general intent to help charity.

If there is specific intent, the court may NOT modify the trust. The trust will be terminated and become a resulting trust (an implied trust that is held for the settlor or his/her heirs).

If there is general intent, the court will substitute a similar charity.

The modern approach is to presume a general intent and apply the cy pres doctrine.

Cy Pres Doctrine Tips:

Look for facts indicating that a trust was created for the benefit of a charity that no longer exists (such as a retirement home, college or university, or zoo). There will usually be a similar charity that is in existence and it will ask the court to modify the trust and substitute it as the beneficiary of the trust.

To earn full credit on the exam, you must carefully analyze whether the trustor intended for the trust to only benefit one specific charity (such as one specific retirement home), or if the trustor intended to generally benefit charity (all retirement homes).

Question 9

Remedial trusts

Answer 9

Resulting Trust. When a trust fails in some way, or when there is an incomplete disposition of trust property, a court may create a resulting trust requiring the holder of the property to return it to the settlor or to the settlor’s estate/heirs. When a testamentary trust fails, the residuary legatee succeeds to the property interest. The purpose of a resulting trust is to achieve the settlor’s likely intent in attempting to create the trust, as well as to prevent unjust enrichment.

Resulting trusts may be imposed when there is:

i) A failure of an express trust, either because the trust is void or unenforceable or because the beneficiary cannot be located, unless the trust provides for disposition of the trust property in cases in which the trust may fail; or
ii) There is an incomplete disposition of trust assets due to an excess corpus.

Examples:

(a) The settlor specifically intended the trust to benefit a particular charity, but that purpose has become illegal, impracticable, or impossible to perform.
(b) A beneficiary has died without the settlor’s knowledge prior to the creation of the trust.
(c) If a trust does not meet the requirements of the Statute of Wills and thus is not a testamentary trust, it may still be deemed a resulting trust if it is “semi-secret” (a gift is directed in a will to be held in trust, but the testator fails to name a beneficiary or specify the terms or purpose of the trust).

Question 10

Alienation

Answer 10

A beneficiary’s equitable interest in trust property is freely alienable (it can be sold or used as collateral for a loan) unless a statute or trust instrument limits this right.

Question 11

Discretionary trust (beneficiary/creditor rights to distribution)

Answer 11

When a trust is discretionary, the trustee is given complete discretion regarding whether or not to apply payments of income/principal to the beneficiary.

The beneficiary’s interest can only be reached by creditors if the trustee exercises his discretion to pay (and there is no spendthrift restriction). If the trustee exercises his discretion to pay, then the beneficiary’s creditors have the same rights as the beneficiary, unless a spendthrift restriction exists. If the discretion to pay is not exercised, then the beneficiary’s interest cannot be reached by his creditors.

The beneficiary of a fully discretionary trust lacks standing to challenge the actions or inactions of the trustee unless there is a clear abuse of discretion.

Question 12

Beneficiary/creditor rights to distribution (besides discretionary trust)

Answer 12

Support Trusts. A support trust directs the trustee to pay income or principal as necessary to support the trust beneficiary. Creditors cannot reach the assets of a support trust, except to the extent that a provider of a necessity to the beneficiary can be paid directly by the trustee.

Mandatory Trust. Trustee has no discretion; the trust governs when trust property is to be distributed.

Spendthrift Trust. A spendthrift trust expressly restricts beneficiary’s power to voluntarily or involuntarily transfer his equitable interest (this is called a spendthrift clause). Creditors usually cannot reach the trust interest, unless money is owed for child/spousal support, or to basic necessities providers, or tax lien holders.

Question 13

Settlor’s power to amend

Answer 13

If a settlor of a trust has the power to revoke a trust (i.e. if it is revocable), she also has a power to modify or amend the trust. In the absence of such power (i.e. for an irrevocable trust), modification, amendment, or termination can occur only with the consent of all beneficiaries and if the proposed change will not interfere with a primary purpose of the trust.

An amendment to a trust does not have to be executed with the formalities prescribed for the execution of a will. No witness or signature requirements!

Question 14

Termination of trusts

Answer 14

Beneficiaries Consent. A trust may terminate if the settlor is deceased/has no remaining interest, and all the beneficiaries (this includes the income beneficiaries and remainder beneficiaries) consent.

Automatic (Purpose Achieved). A trust terminates automatically only when the trust purpose has been accomplished.

A trustee can block a premature trust termination by the beneficiaries if the trust is shown to have an unfulfilled material purpose.

The most common example of a trust that has an unfulfilled material purpose is one in which the settlor provided for successive interests, in which case both the present and the future beneficiaries must agree in order for the trust to be terminated prematurely.

Trustee. A trustee has no power to terminate the trust, UNLESS:

(a) The trust contains express termination provisions.
(b) The value of the trust property is less than $50,000, and the trustee concludes that this is insufficient to justify the cost of administration. The trustee must give notice to qualified beneficiaries before terminating the trust.

Judicial Termination.

Question 15

Removal of trustee

Answer 15

Beneficiaries may sue the trustee and seek damages or removal of the trustee for breach of duties.

A court can remove a trustee if:

(a) the purpose of the trust would be frustrated by the trustee’s continuance in office
(b) the trustee violated a duty
(c) the court determines that the value of the trust property is insufficient to justify the cost of administration(?)

Question 16

Disclaimer

Answer 16

Almost all states have enacted statutes that permit beneficiaries of trusts to disclaim their interest in the trust property. In most states, a disclaimer is not effective unless it is reduced to writing within 9 months after the future interest would become “indefeasibly vested.”

If the income beneficiary of a trust disclaims her interest, then the trust principal becomes immediately distributable (accelerates) to the remainder beneficiaries of the trust as long as the remainder is vested (as long as the remainder is not contingent upon a condition).

When a future interest holder effectively disclaims that interest, the disclaimant is deemed to have predeceased the life tenant.

Example 1: A testator creates a valid testamentary trust. Under the terms of the trust, all trust income would be paid to the testator’s son during his lifetime, and upon his death, the trust assets would be distributed to the testator’s grandson. The testator dies. One week later, the testator’s son effectively disclaims his interest in the trust income.

Analysis: Because the testator’s son is the income beneficiary and effectively disclaimed his income interest, the trust principal is automatically distributable to the grandson (the remainder beneficiary) because the grandson’s interest is vested (there is no contingency that must be met here).

Example 2: Same trust as above. The testator dies. Within nine months, the testator’s grandson effectively disclaims his future interest in the trust principal.

Analysis: The income from the trust is paid to the son for as long as he lives. When the son dies, because the grandson effectively disclaimed his interest, the trust principal reverts back to the testator’s estate or, if the anti-lapse rules apply, the trust principal will go to the grandson’s issue.

Question 17

Class gifts (14.8%?)

Answer 17

When a future interest in a trust is in the form of a gift to a group of individuals (i.e., a class gift), the class remains open and may admit new members until:

(i) at least one class member is entitled to obtain possession of the gift, or
(ii) the preceding interest terminates (e.g., the holder of the present life interest dies).

Class gifts are generally permissible. The settlor can make “my children” the beneficiaries of the trust.

Gifts to Surviving Children: Unless the governing instrument provides otherwise, the general rule is that the gift is expressly limited to the transferor’s surviving children, so that the surviving issue of a deceased child does not take.

Example 3: A settlor placed his assets in a trust. The terms of the trust provided that the trust principal was to be paid on his death to his surviving children equally. At the time of the creation of the trust, the settlor had three children, A, B, and C. A predeceased the settlor, but was survived by a child, D. The settlor has recently died, survived by B, C, and D.

Analysis: Under common law and UPC, the trust principal would be divided equally between B and C because A predeceased the settlor. Because A predeceased the settlor, D takes nothing.

Question 18

Lapse of a gift (13%?)

Answer 18

In most states, anti-lapse statutes do not apply to nonprobate gifts, and, therefore, if a gift to “issue” fails by reason of the non-survival of the issue, then children and further descendants of the deceased issue will not take under the trust.

However, some states have enacted UPC § 2-707 or a similar statute, under which a substitute gift is created in the descendants of the deceased issue. When such statutes govern, even words of survivorship (e.g., “to those of my issue who are living”) will not cut off this substitute gift.

Question 19

Trustee powers

Answer 19

The trustee has powers granted expressly in the trust, and powers necessary to act as a reasonably prudent person in managing the trust, including the implied power to contract, sell, lease, or transfer the trust property.

A trustee has no power to terminate the trust, UNLESS:

(a) The trust contains express termination provisions.
(b) The value of the trust property is less than $50,000, and the trustee concludes that this is insufficient to justify the cost of administration. The trustee must give notice to qualified beneficiaries before terminating the trust.

Question 20

Trustee’s duty of loyalty (14.8%)

Answer 20

The trustee has a duty to administer the trust in the best interests of the beneficiaries, acting reasonably (objective standard) and in good faith (subjective standard) in the management of the trust.

(1) Self-Dealing. When the trustee personally engages in a transaction involving trust property, a conflict of interest arises between the trustee’s duties to the beneficiaries and her own personal interest.
(a) Prohibited transactions: buying/selling trust assets, selling property between trusts that trustee manages, borrowing from or making loans to trust, using trust assets to secure personal loan, engaging in prohibited transactions with friends/relatives, or otherwise acting for personal gain through trustee position.
(b) Per se breach: There is an irrebuttable presumption that trustee breached duty of loyalty when self-dealing is an issue; no further inquiry into trustee’s reasonableness or good faith is required because self-dealing is a per se breach.
(c) Exceptions: Even when self-dealing is authorized (by settlor, court order, or all beneficiaries), the transaction must still be reasonable and fair to avoid liability for breach.
(d) Remedy: The beneficiaries can either (i) set aside the transaction, or (ii) ratify the transaction and recover the profits from the transaction.
(2) Conflict of Interest. When a trustee invests trust assets in a corporation in which the trustee has an interest (for example, owns stock in the corporation) that might affect the trustee’s judgment, a conflict of interest arises.
(a) Breach presumed: There is a presumption of a breach of the duty of loyalty that can be rebutted by showing that (i) the terms of the transaction were fair, or (ii) that the transaction would have been made by an independent party.

Question 21

Trustee’s duty of prudence (14.8%)

Answer 21

The trustee has a general duty to act as a reasonably prudent person and treat the trust property as if it was his/her own. This includes the duty to follow the trust directions and carry them out in accordance with the trust.

Investments (frequently tested).

Prudent Investor Rule: Requires trustee to act as a prudent investor would act when investing his own property (putting less emphasis on risk level); trustee must exercise reasonable care, caution, and skill when investing and managing trust assets.

Duty to Diversify: Trustee must adequately diversify the trust investments in order to spread the risk of loss under a total performance portfolio approach, but not if administrative costs would outweigh the benefits.

Duty to Make Property Productive: Pursue all possible claims, derive the maximum amount of income from investments, sell assets when appropriate, secure insurance, pay expenses, and act within a reasonable period of time in all matters. (Example: If the trust contains rental property, a failure to try and rent the property would be a breach of duty.)

Duty to be Impartial to Present Beneficiaries: Balance interests of the present beneficiaries (must not favor one of the present beneficiaries over the others, unless trust provides for it). This still applies even if, e.g., one beneficiary suffers from a health condition and is unable to work.

Duty to be Impartial to Present vs. Future Beneficiaries: Trustee must balance the interests of the present and future beneficiaries by investing property so that it produces a reasonable income for the income beneficiaries while preserving the principal for the remainder beneficiaries.

Question 22

Trustee’s duties and remedies for violations (14.8%)

Answer 22

Duty of Loyalty: Administer the trust in good faith (subjective standard) and act reasonably (objective standard) when investing property and otherwise managing the trust solely in the best interests of the beneficiaries. Avoid self-dealing and conflicts of interest.

Duty of Prudence: Act as a reasonably prudent person and treat the trust property as if it were the trustee’s own. This includes the duty to follow the trust directions and carry them out in accordance with the trust.

Prudent Investor Rule

Duty to Diversify

Duty to Make Property Productive

Duty to be Impartial to Present Beneficiaries and Present vs. Future Beneficiaries

Duty to Disclose: Disclose complete and accurate information about nature and extent of the trust property, including allowing access to trust records and accounts.

Duty to Account: Periodically account for actions taken on behalf of the trust so that trustee’s performance can be assessed against the terms of the trust.

Remedies for Violation of Trustee’s Duties: Lost profits, interests, and other losses resulting from a breach of trust are trustee’s responsibility; beneficiaries may sue the trustee and seek damages or removal of the trustee for breach of duties.

Question 23

Allocation between trust principal and income

Answer 23

All assets received by a trustee must be allocated to either income or principal. The allocation must be balanced so as to treat present and future trust beneficiaries fairly, unless a different treatment is authorized by the trust instrument.

Traditional Approach: Assumed that any money generated by trust property was income, and that any money generated in connection with a conveyance of trust property was principal. The traditional approach serves as the starting point for the modern approach.

UPAIA: Under the UPAIA, a trustee is empowered to re-characterize items and reallocate investment returns as he deems necessary to fulfill the trust purposes, as long as his allocations are reasonable and are in keeping with the trust instrument. A distribution of stock is treated as a distribution of principal under the UPAIA.