Trust and Probate Law and Custom

Question 1

What are the two title interests in property, and how are those interests divided under a trust?

Answer 1

An owner holds a legal and equitable title to property. In a trust, legal title is held by the trustee; equitable title is held by the trust beneficiaries. Thus, the trustee is the record owner of the property, and the beneficiaries are entitled to use and enjoy the property within the confines of the trust and applicable law.

Question 2

True or False.

A trust will not fail for want of a settlor.

Answer 2

Trust
Certain types of trusts, called implied trusts, arise by operation of law. In other words, an implied trust is created despite the lack of a settlor. Therefore, a settlor is not a requirement of a valid, implied trust.

Question 3

What are the two types of implied trusts?

Answer 3

The two types of implied trusts are constructive trusts and resulting trusts. A constructive trust essentially is a fraud-rectifying trust, imposed by a court to protect hose who lose property to a wrongdoer. A resulting trust is an intent-enforcing trust, based upon the presumed intent of a transferor of property.

Question 4

What are the five common law requirements of an express trust?

Answer 4

The five common law requirements of an express trust are:

(i) intent to create a trust by a legally cometent settlor,
(ii) present declaration or act of transfer by the settlor,
(iii) existence of a trust corpus,
(iv) naming of a trustee,
(v) identification of identifiable beneficiaries.

Question 5

True or False.

Precatory words are used by a settlor to confer legally enforceable duties upon the trustee.

Answer 5

False.
The use of precatory words, such as I desire or I request, without more, do not create legally enforceable duties in a trustee.

Question 6

Egbert creates a trust under which he declares that any interests in real property that he received under the will of his dear Uncle Ned are held in trust for the benefit of Egbert’s 11 year old son, Devon. Uncle Ned is thrilled because Devon is his favorite grandnephew. An enforceable trust has not been created because

a. An expectancy under a will is not a transferable property interest
b. Uncle Ned is not competent because a grandnephew cannot be the natural object of his bounty
c. A minor cannot hold an interest in real property, not even an equitable interest held in trust
d. The transfer violates the rule against perpetuities because Uncle Ned may survice for 21 years after the creation of the trust

Answer 6

a.
At common law, the corpus of a trust must consist of a transferable property interest, and expectancy under a will does not constitute such an interest. The existence of a statute allowing a settlor to make testamentary additions to an inter vivos trust does not affec this result. Devon reasonably could be the object of his granduncle’s bounty; therefore, B is not the correct answer. C is incorrect because a child may be a beneficiary under a trust, regardless of the nature of the trust corpus. D is not the best answer because even if Edbert had a contingent interest in Uncle Ned’s property at the time of the trust’s creation, that interest would have vested in Devon, or his heirs, immediately upon Uncle Ned’s death, which is within the period set forth in the rule.

Question 7

What are some of the nontax reasons that a settlor may have for creating an express trust?

Answer 7

Among the many nontax reasons for creating a trust are (i) professional asset management

(ii) greater flexability in selecting a post-mortem fiduciary than under most probate laws;
(iii) asset protection from creditors or spendthrift beneficiaries
(iv) expert management of special assets, such as a closely held business
(v) special needs of disabled beneficiaries;
(vi) special nontax goals, such as a vehicle for making contributions to charity

Question 8

For what reasons might a trust terminate?

Answer 8

A trust may terminate because of

(i) the occurence of a condition for termination set forth in a revocable trust instrument
(ii) a court ruling that the trust is terminated because of a mistake in its creation
(iii) a court determination that the trust’s purposes have been accomplished and all interested persons are before the court and consent to the termination OR
(iv) the trust terminates by operation of law, such as the trust’s purpose has become illegal

Question 9

What is the effect of a beneficiary disclaiming his or her interest in a trust?

Answer 9

At common law and by statute in most states, a disclaimer by a beneficiary causes an acceleration of the remainder interest in the trust. Thus, a disclaimer is equivalent to the death of the disclaimant prior to the effective date of the governing instrument.

Question 10

What is the primary difference between a revocable and an irrevocable trust?

Answer 10

A revocable trust may be revoked, amended, or modified, typically during the lifetime of the settlor.
An irrevocable trust generally cannot be revoked, amended or modified absent a court-ordered termination

Question 11

When will a trust instrument be deemed irrevocable?

Answer 11

In most states, a trust instrument is irrevocable if the settlor does not expressly reserve in some person the right to revoke, amend, or modify the trust. Thus, a trust instrument generally is revocable only if the settlor makes such an express reservation of power in the trust instrument.

Question 12

What are the primary reasons that a settlor may have for creating an irrevocable trust?

Answer 12

The primary reason for creating an irrevocable trust are

(i) providing a vehicle for making a completed gift while retaining some control over the use and enjoyment of the property; and
(ii) tax savings that accompany the making of a completed gift.

Question 13

What are the primary advantages of using a trust rather than a will to dispose of one’s assets at death?

Answer 13

The two primary advantages of using a trust rather than a will to dispose of one’s assets at death are

(i) the avoidance of probate administration of one’s estate; and
(ii) the valuation of trust assets and the dispositive terms of the trust are not made available to the public.

Question 14

What is the primary difference between an inter vivos trust and a testamentary trust?

Answer 14

An inter vivos trust becomes operative during the lifetime of the settlor.
A testamentary trust is created under a will. Thus a testamentary trut must be executed with the formalities required for a will under state law. Additionally, property passing under a testamentary trust is subject to probate administration, and the governing instrument is available for public inspection.

Question 15

What are the two components of a typical A-B estate plan?

Answer 15

An A-B estate plan consists of
(i) a unified credit shelter trust, and
(ii) a marital trust or bequest
Under current law (2015), $5,430,000, reduced by the amount of taxable gifts made by a decedent during his or her lifetime, may be shelteredfrom federal transfer tax at death under the applicable exclusion amount.
Additionally, a decedent may transfer an unlimited amount of property to a surviving spouse without the imposition of federal transfer tax at the decedent’s death.
Therefor, an A-B plan generally creates a formula under which $5,430,000, or the decedent’s remaining applicable exclusion amount, is allocated to the unified credit shelter trust or bequests, and the balance of the decedent’s estate is allocated to the marital trust or bequest, and the balance of the decedent’s estate is allocated to the marital trust or bequest. Such a plan results in no imposition of federal transfer tax at the death of the decedent.

Question 16

Under a credit shelter trust, what is the difference between the one-pot and several-pot structures upon the death of the second spouse to die?

Answer 16

Under the several-pot approach, property of the credit shelter trust is divided upon the death of the surviving spouse into separate trusts for each of the spouses’ childern; property from one child’s trust ordinarily is not available to another child. Upon the one-pot approach, property of the credit shelter trust is retained in a single trust until the occurrence of a particular condition, such as the youngest child reaching a stated age. The single-pot approach is used when funds are insufficient to establish separate trusts or the parents are concerned about the special needs, especially the medical needs, of a particular child.

Question 17

What are the four categories of marital trusts?

Answer 17

The four types of marital trusts are the

(i) power of appointment trust,
(ii) estate trusts,
(iii) qualified terminable interest property (QTIP) trust, and
(iv) qualified domestic trust (QDT)

Question 18

Under what circumstances will a power of appointment trust qualify for the marital deduction?

Answer 18

A power of appointment trust will qualify for the marital deduction if

(i) the spouse is entitled to all trust income generated during his or her lifetime;
(ii) the trust income is paable to the spouse at lease as frequently as annually;
(iii) the spouse is given an inter vivos or testamentary power of appointment over the trust property that is exercisable by the spouse alone and in all events; and
(iv) no person other than the spouse has the power to appoint trust property to anyone other than the spouse

Question 19

How does an estate trust differ from a power of appointment trust?

Answer 19

Under an estate trust, the surviving spouse and his or hr estate are the only trust beneficiaries. Therefore, income needs not be paid to the spouse, and underproductive property may be retained in the trust without jeopardizing the marital deduction. Upon the surviving spouse’s death, all of the trust property is distributed to that spouse’s estate. The primary disadvantage of an estate trust is that the surviving spouse cannot appoint trust property during his or her lifetime to family members.

Question 20

How does a qualified terminable interest property (QTIP) trust differ from a power of appointment trust?

Answer 20

A qualified terminable interest property (QTIP) trust is like a power of appointment trust without the power of appointment. Thus, the surviving spouse must be entitled to all of the income of the trust during his or her lifetime, payable at least annually. Under a (QTIP) trust, at the death of the surviving spouse, the trust property is distributed as directed by the donor spouse inthe trust instrument. To qualify the trust for the marital deduction, an irrevocable QTIP election must be made on the donor spouse’s estate tax return.

Question 21

What is the difference between a charitable remainder trust and a charitable lead trust?

Answer 21

Under a charitable remainder trust, noncharitable beneficiaries are the current beneficiaries of the trust, and one or more charities are the remainder beneficiaries of the trust.
A charitable lead trust is the flip side of a charitable remainder trust; thus, under a charitable lead trust, one or more charities are the current beneficiaries, and the noncharitable beneficiaries are the remainder beneficiaries.

Question 22

What is the difference between an annuity trust and a unitrust?

Answer 22

An annuity trust pays a sum certain, which is determined when the trust is created, to the current beneficiaries each year. In contrast, a unitrust pays a fixed percentage of the fair market value of trust principal to the current beneficiaries each year.