Trust

Question 1

Trust definition

Answer 1

A trust is a relationship in which a trustor gives a trustee the right to hold legal title to property under a fiduciary duty to manage, invest and safeguard the trust assets for the benefit of the designated beneficiary.

Question 2

Methods for creating a trust

Answer 2

one of the following methods:

1. a declaration by a property owner that he holds the property as trustee.
2. a transfer of property during the owner’s lifetime to another as trustee.
3. a transfer of property by means of a will taking effect upon the owner’s death (testamentary).
4. an exercise of a power of appointment to another person as trustee.
5. an enforceable promise to create a trust.

Question 3

Can a trust be revoked?

Answer 3

1. UTC (majority)—trusts are presumed to be revocable
2. Traditional rule (minority)—trusts are presumed to be irrevocable

Question 4

Requirements for a valid trust

Answer 4

1. Manifestation of an intent to create the trust (wishful language is inadequate)
2. Property (res): trust must have identifiable property. The property cannot be an expectancy under a will or illusory.
3. Purpose: the trust must have a purpose that is not illegal or against public policy.
4. Beneficiary: there must be ascertainable beneficiaries unless it is a charitable trust.

trustee need not be named.

Question 5

define

settlor

Answer 5

creator of the trust; must have capacity the same as for making a will

Question 6

define

trustee

Answer 6

must have capacity to acquire and hold property as well as administer the trust.

A trustee can be appointed by a court or the settlor or removed by a court or by settlor on several grounds. The beneficiary can remove T only if the trust provides.

Question 7

Limitations on trust

Answer 7

1. Real property: a trust for real property must be in writing and signed (SOF).
2. Personal property: the existence of an oral trust must be established by clear and convincing evidence.
3. 21-year maximum for trustees: trustee may perform for only 21 years. (RAP)
4. The execution or revocation of a trust is ineffective if it was procured by duress, menace, fraud, or undue influence.

Question 8

express trust

Answer 8

property is transferred from one owner to another and meets the trust requirements, such that a trustee holds legal title for the benefit of a beneficiary, with the settlor having a present manifestation of intent to create the trust for a legal purpose.

Question 9

inter vivo (living trust)

Answer 9

lifetime transfers in trust

• Declaration of trust—S declares herself trustee and is paid income during her life with the property going to the beneficiaries at her death; if real property, it must be in writing
• Deed of trust—S creates a trust and is not the trustee; delivery of the deed and transfer of the deed or property to T is required; must always be in writing
• Revocable—can be revocable or irrevocable

Question 10

Pour-over trust

Answer 10

A trust that is structured to receive and dispose of assets at the settlor’s death. A pour-over trust is often established through the settlor’s will, which must be in writing.

Question 11

Testamentary trust

Answer 11

A trust that is created by a will, and the will contains the material provisions of the trust, and the trust arises upon the death of the testator.

Question 12

secret trust

Answer 12

A secret trust occurs when the settlor leaves a gift to the beneficiary on the face of his will without indicating an intent to create a trust in the will, but does so in reliance on a promise that the beneficiary will hold the property in trust for another.

(beneficiary of the will is the trustee)

Question 13

semi-secret trust

Answer 13

A semi-secret trust occurs when the settlor leaves a gift in his will to a person in trust but does not identify the beneficiary of the trust.

• Majority: semi-secret trusts are invalid and apply a resulting trust
• Minority: allows extrinsic evidence to prove the trust.

Question 14

support trust

Answer 14

A support trust directs the trustee to make limited distributions to pay for the beneficiary’s support, health, maintenance, or education, and is not accessible to creditor to the extent it would interfere with the support.

Question 15

spendthrift trust

Answer 15

A spendthrift trust occurs when the beneficiary cannot alienate his interest, such that his interests are protected from creditors unless for necessaries, alimony, and child support, or government creditors.

Question 16

Discretionary trust

Answer 16

A discretionary trust give the trustee discretion to distribute or withhold payments, principal, or income to the beneficiary.

Question 17

charitable trust

Answer 17

a trust created for a charitable purpose benefiting the society.

• Cy pres doctrine: when a charitable objective becomes impossible or impracticable to fulfill, courts often apply the cy pres doctrine and substitute another similar charitable object that is as near as possible to the settlor’s intent.
• resulting: if the cy pres doctrine will not fulfill the settlor’s intent, the courts will apply a resulting trust.

Question 18

Honorary trust

Answer 18

An honorary trust is one in which there is neither a private beneficiary nor a charitable purpose. Generally, these trusts are invalid, except to care for pets or maintain cemetery plots.

Question 19

Totten trust

Answer 19

A Totten trust is one where the settlor places money in a bank account with instructions that the named beneficiary takes any amount left at the death of the settlor.

Question 20

resulting trust

Answer 20

an implied-in-fact trust based upon the presumed intent of the parties and will transfer the property back to the settlor or his estate when:

1. the purpose of the trust is satisfied or ends;
2. an express trust fails;
3. a charitable trust ends and the cy pres doctrine is inapplicable;
4. the trust is illegal;
5. there is excess res in the trust;
6. a purchase money resulting trust results where one party (B) pays consideration for property but allows title to the property to be taken in the name of another (trustee); or
7. there is a semi-secret trust.

Question 21

constructive trust

Answer 21

an equitable remedy to prevent unjust enrichment when:

1. there is self-dealing or breach of fiduciary duties;
2. there is fraud in the inducement or undue influence;
3. secret trusts are involved; or
4. oral real estate trusts are created.

Question 22

powers of the trustee

Answer 22

1. Express—T has the powers set forth in the trust and often a power to revoke or modify
2. Implied—T has the implied power to contract, sell, lease, or transfer trust property and those powers necessary to act as a reasonably prudent person in managing the trust

Question 23

duties of the trustee

Answer 23

1. Account to and inform B with a statement of income and expenses of the trust on a regular basis.
2. Not Delegate his trustee duties to others. In modern jurisdiction, delegation is allowed if the trustee exercises due care and skill when selecting agents.
3. Be Impartial when dealing with the income B and the remainderman B.
4. Use Due care and act as a reasonable prudent person
5. Duty to Investigate any investment
6. Duty to Diversify investments.
7. Segregate and earmark trust fuds and not commingle the trust funds with the trustee’s own funds.
8. duty of Loyalty: T may not participate in self-dealing, must avoid conflict of interest, and must treat all B equally;
9. Prudently Invest the trust property; (UPIA provides a trustee’s performance is measured in the context of the entire trust portfolio);
10. Defend actions that may result in a loss to the trust and Enforce claims that are part of the trust property

mnemonic: AND I DID SLIDE

Question 24

Liabilities of the trustee

Answer 24

A trustee is personally liable for

1. violating his trustee duties;
2. torts committed by him, and his agents if they were committed within the scope of supervision, against third parties;
3. contracts made within the scope of his trust supervision, unless the contract itself provides otherwise.

Question 25

Liabilities of third parties

Answer 25

1. transfer of property to a bona fide purchaser cuts off a beneficiary’s interest, but if the transfer is not to a bona fide purchaser, then the beneficiary can set aside the transaction.
2. a third party who knowingly receives trust property will hold that property as a constructive trustee and will be liable for any losses to the trust.

Question 26

Allocation of the trust

Answer 26

trust assets are allocated as follows:

1. beneficiaries of the trust are entitled to income from interest income, cash dividends, and net business income, but must pay interest on any loan debt, taxes, or minor repairs.
2. remaindermen of the trust are entitled to principal from the net proceeds on the sale of an asset, stock dividends, and profits from sale of stock, but must pay the principal part of the loan debt and for major repairs;
3. subject to the trustee’s best judgment: trustee can utilize his best judgment in carrying out the terms of the trust the follow the settlor’s intent.

Question 27

trust modification

Answer 27

majority rule: settlor can modify or revoke the trust only if the power is expressly reserved in the trust.

CA: trusts are revocable unless stated otherwise.

The court can modify the trust, such as for cy pres purposes or changed circumstances due to unforeseen circumstances and necessity, in order to meet the settlor’s intent.

Question 28

trust termination

Answer 28

• Trustee: a trustee has no power to terminate unless provided in the trust;
• Beneficiary: beneficiaries may compel termination if they are all competent, all consent, and termination does not frustrate the purpose of the trust.
• Settlor: a settlor can terminate the trust if he reserved the power to do so
• Court: can terminate the trust if the purpose becomes frustrated or impossible or illegal, or if there are changed circumstances
• Lapse/Anti-lapse rules also apply to trusts.

Question 29

Breach of trust

Answer 29

Remedy options for breach of trust include damages, a constructive trust, tracing and an equitable lien on the property, ratification of the transaction, and waiver of breach, suit for resulting loss, or removal of trustee.

• the trustee cannot offset the losses where one breach results in a gain and another results in a loss.
• Laches: the trustee can argue laches if the beneficiary waited an unreasonably long period to bring a claim that, as a result, caused prejudice to the trustee or other beneficiaries.