TRUST

Question 1

When is a trust valid?

Answer 1

A trust of personal property is valid if it has a trustee, a beneficiary, and trust property.

Question 2

Trustee

Answer 2

A trustee manages the trust property and holds it for the benefit of the beneficiaries. Note that a trust will not fail for lack of a specifically appointed trustee. (The court will appoint one.)

Question 3

Beneficiary

Answer 3

In a private express trust, beneficiaries must be definite and ascertainable.

The same person cannot be the sole trustee and sole beneficiary or the trust collapses.

Question 4

Trust property (trust res)

Answer 4

Trust property must be identifiable.

Question 5

When is a settlor promise to create trust in the future valid?

Answer 5

A settlor’s promise to create a trust in the future is valid only if (1) supported by consideration; (2) he manifests anew an intention to create the trust when the assets come into existence.

Question 6

Can a trust be revoked?

Answer 6

Yes, Under the Uniform Trust Code (UTC), the default rule is that a trust is revocable. An irrevocable trust can still be terminated or modified in some circumstances.

Question 7

Presumption of revocability

Answer 7

Under the UTC, an inter vivos trust is revocable unless the instrument expressly states otherwise.

Question 8

Termination by settlor

Answer 8

A settlor may terminate the trust if all beneficiaries are in existence and all agree to the termination.

Question 9

Termination by beneficiaries after settlor dies

Answer 9

Generally, even an irrevocable trust can be terminated if both the income beneficiaries and the remaindermen unanimously consent and if there is no material purpose of the trust yet to be performed.

Question 10

What is Pourover will?

Answer 10

A will that makes a gift to a trust is valid so long as the trust is identified in the will and the terms are incorporated in a writing executed before or concurrently with the execution of the will. Under the modern approach, later made amendments to the trust are valid. Under common law, amendments made after execution of the will are not valid.

Question 11

What is a Discretionary trust?

Answer 11

The trustee has the discretion to decide when to make a distribution to a beneficiary. The beneficiary cannot demand any part of the income or principle. Nor can a creditor, unless it shows the trustee acted dishonestly or in a state of mind “not contemplated” by the settlor. (There is an exception under the UTC for child support or alimony.)

Question 12

Support trust

Answer 12

The trustee must pay what is necessary for the beneficiary’s support.

Question 13

Spendthrift Trust

Answer 13

Restrains “both the voluntary and involuntary” transfer of beneficiary’s interest

Right of a creditor: generally, a creditor may not reach (i.e., by garnishment or attachment) part of a beneficiary’s distribution prior to the beneficiary reaching it.
§There are some favored creditors that are exceptions to this rule: (1) a child or spousal support creditor (for maintenance and support), (2) a judgment creditor who has provided services for the protection of a beneficiary’s interest in the trust (e.g., a lawyer), (3) a claim of the state or United States (usually for taxes), and (4) creditors with claims for necessaries in some states (this fourth category is not recognized in states that follow the UTC).

Question 14

Charitable trust

Answer 14

A charitable trust may be created for a charitable purpose (including for the relief of poverty, the advancement of education, the advancement of religion, the promotion of health, governmental or municipal purposes, or other purposes that are beneficial to the community). It must have a large number of not readily identifiable individuals (rather than a few identifiable individuals). Note that a charitable trust is not subject to the common-law rule against perpetuities.

Question 15

Modifying a charitable trust

Answer 15

A charitable trust may terminate if the charitable purpose becomes unlawful, impracticable, or impossible. However, cy pres may save the trust. Cy pres is a common law doctrine that is also a part of the UTC. It states: if a particular charitable purpose has become unlawful, impracticable, or impossible to achieve; no alternative charity is named in the trust; and the court finds that the settlor had general, rather than specific, charitable intent, then the court may apply cy pres to modify or terminate the trust by directing that the trust property be distributed in a manner consistent with the settlor’s general charitable intent.

Question 16

Honorary trust

Answer 16

This is a trust that does not have a charitable purpose or a definite beneficiary. It is often a trust to take care of a thing (e.g. cemetery plot) for a noncharitable purpose. Under the UTC, this is valid but may not be enforced for more than 21 years. Under common law, such a trust would not be valid if it violates the rule against perpetuities, but a court may characterize the trust as a “power” and allow the trustee to exercise that power in accordance with the trust terms for 21 years.

Question 17

Duty of loyalty

Answer 17

A trustee has a duty of loyalty to act in the best interest of the beneficiaries.

Question 18

Duty of care—prudent administration

Answer 18

A trustee has a duty to prudently administer the trust

Question 19

Uniform Prudent Investor Act (UPIA)

Answer 19

Almost all states have adopted a form of the UPIA. The UPIA states that a trustee must “administer the trust as a prudent person would, using reasonable care, skill, and caution.”

Question 20

Entire estate portfolio examined to determine prudence

Answer 20

A trustee’s investment and management decisions with respect to individual assets should be evaluated in the context of the portfolio as a whole and as a part of an overall investment strategy rather than in isolation.

Question 21

Duty to diversify

Answer 21

The trustee is not liable for declines in value due to a downturn resulting from general economic conditions—but is liable for failure to diversify absent directions to the contrary.

Question 22

Remedies for a breach of trust

Answer 22

The remedies include: Suspending or removing a trustee, decreasing compensation, compelling a trustee to perform trust duties, compelling payment of damages, etc.

Question 23

Self-dealing

Answer 23

In a self-dealing case, the trust beneficiaries may rescind the transaction and ask for the self-dealing purchase to be set aside (the trust property is returned to the trust and the amount paid is refunded by the trust) or recover any profits the trustee made by reason of the breach.

Question 24

General and Special powers of appointment.

Answer 24

Purpose: a person writing a will or trust can give her beneficiaries a power of appointment, which enables the beneficiary to designate who will receive specific property.

Question 25

General power of appointment

Answer 25

The class of people that the beneficiary can exercise the power of appointment in favor of is unlimited (she can use it for herself, her creditors, or someone else).

Question 26

Special (or limited) power of appointment

Answer 26

The class of people that the beneficiary can exercise the power in favor of is limited. A special testamentary power needs to be specifically exercised. The Uniform Probate Code (UPC) adopts a substantial compliance rule which says that if it could be shown that the powerholder intended to exercise a power, a blanket exercise clause may be sufficient.

Question 27

Class Gift - Rule of convenience

Answer 27

When a gift is made to a class of persons the class closes when some members of the class can call for a distribution of her share of the class gift.

Question 28

Class Gift - UPC approach

Answer 28

The UPC states that when a class gift is made, each living beneficiary will take their share and the deceased beneficiary’s share will pass to their surviving descendants. (If there are no surviving descendants then the gift will fail.) Note: this applies even if the beneficiary is not related to the settlor (and thus differs from most antilapse statutes).

Question 29

Class Gift -Common law approach:

Answer 29

Under the common law, if the gift or remainder to a deceased beneficiary has already vested and there is no applicable statute, then it will go to whomever the instrument says it should go to or whomever the deceased person has specified in their will or through intestacy.

Question 30

What happens when the testator gives a gift to a group of unrelated individuals and one predeceased him?

Answer 30

if the testator gives a gift to a group of unrelated individuals and one predeceased him, the deceased would not take, and neither would his descendants unless the antilapse statute saved the gift.

Question 31

Predeceasing class members

Answer 31

``` Surviving of a class member until the time of closing is not required to share in future gifts. The express terms of the trust controls. ```

Question 32

Disclaimers

Answer 32

A beneficiary of a trust has the right within a reasonable time after learning of the trust, to disclaim the benefit of the interest, absent some act of expressed or implied acceptance. Upon disclaimer, any interest that otherwise would pass to that person under the trust passes as though the disclaimer party predeceased the life tenant.

Question 33

Abuse of Discretion

Answer 33

A trustee has a fiduciary duty to exercise her power in accordance with the terms of the trust. failure to do so constitutes a breach of trust.