Trust Flashcards
Key principle #1: regarding validity of a trust, most MEE answers state: “a trust of personal property is valid if it
has a trustee, a beneficiary, and trust property.”
Trustee: 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.)
- Beneficiary: In a private express trust, beneficiaries must be definite and ascertainable. Further, the same
person cannot be the sole trustee and sole beneficiary or the trust collapses. - Trust property (trust res): trust property must be identifiable.
Key principle #2: 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.
Presumption of revocability: under the UTC, an inter vivos trust is revocable unless the instrument
expressly states otherwise.
- Termination by settlor: a settlor may terminate the trust if all beneficiaries are in existence and all agree
to the termination. - Termination by beneficiaries after settlor dies: 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. Claflin v. Claflin.
Key principle #3: Be familiar with the variety of trusts that can be created. The following have been tested:
Pourover will: 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. You are expected to articulate the differences between
these two approaches on the MEE.
- Discretionary trust: The trustee has 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.) - Support trust: the trustee must pay what is necessary for the beneficiary’s support.
Variety of trust continued
Spendthrift trust: a spendthrift trust restrains “both the voluntary and involuntary transfer of a
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).
* Charitable trust: A charitable trust may be created for a charitable purpose. It must have a large number
of not readily identifiable individuals (rather than a few identifiable individuals).
Modifying a charitable trust -
§ Modifying a charitable trust: 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.
Key principle #4: Be familiar with the duty of loyalty and duty of care. The duty of care is heavily tested.
Duty of loyalty: a trustee has a duty of loyalty to act in the best interest of the beneficiaries.
- Duty of care—prudent administrationUniform Prudent Investor Act (UPIA): 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.”
§ Entire estate portfolio examined to determine prudence: 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.
§ Duty to diversify: This is one of the hallmarks of prudent investing. 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.
Remedies for breach of trust :
Remedies for a breach of trust: The remedies include: Suspending or removing a trustee, decreasing
compensation, compelling a trustee to perform trust duties, compelling payment of damages, etc. (There
are several other remedies, including asking the court to “order any other appropriate relief.”)
Self dealing ?
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.
Key principle #5: know the difference between general and special powers of appointment.
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.
Power of appointment ?
General power of appointment: 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).
§ Majority view: In most states, a general residuary clause in a will (“I give all of my estate . . .
”) does not exercise a power of appointment. However, if the general residuary clause is
coupled with a blanket exercise clause (e.g., “including all property over which I have a
power of appointment”), any power of appointment held by the donee is exercised, unless
the donor of the power specifically requires reference to it.
§ Minority view: a general testamentary power of appointment can be exercised by general
language in the beneficiary’s will (such as the residuary clause) even if it makes no
reference to the power in the instrument (e.g., “Everything to my husband”—the husband
will get it), unless the creating instrument of the power made an express gift in default or
the instrument stated that the power needed to be specifically mentioned.
- Special (or limited) power of appointment: 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.
Key principle #6: be familiar with the different approaches to giving gifts to a class.
Rule of convenience: when a gift is made to a group, such as “my children,” the class closes when at least
one member is entitled to distribution.
- UPC approach: 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). - Common law approach: 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. (This also
applies to gifts that are not made to classes.) - If you see a gift to a class in a Decedents’ Estates question: if a 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.
Valid trust statement.
Settlor with the Intent of creating a trust for Purposes which are valid, transfers Property to a trustee to Hold for the Benefit of ascertainable beneficiarie
Trustee duties.
Trust creates fiduciary relationship between trustee (obtains legal title to res) and beneficiary (obtains equitable title, i.e. financially benefits from trust, to res). Trustee owes duties of care, loyalty, and impartiality. Duty of care standard is reasonably prudent person under circumstances (how RPP would handle their own property) or reasonably prudent investor (no commingling, diversify investment). Duty of loyalty standard is avoiding acting in trustee self-interest/self-dealing
Creditors :
Creditors can only reach trust principal to the extent beneficiaries can.
Creditors can generally reach (attach) trust income UNLESS there is spendthrift provision, in which case only certain creditors can reach the income (government entities re: taxes, child/spousal support; creditors related to debts owed for necessaries).
Creditors can also reach trusts with spendthrift provisions if the trust is a self-settled trust (settlor and beneficiary are one and the same). Even with a spendthrift provision, a creditor can reach trust distributions once they have already been distributed to the beneficiary (i.e. a separate judgment action against the beneficiary rather than reaching the trust directly).
Allocation of Assets :
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. ?
The 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.?Under the UPAIA (modern approach), 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.
