Trust Creation/Modification/Termination

Question 1

What is a spendthrift trust?

Answer 1

A spendthrift trust expressly restricts the beneficiary’s power to voluntarily or involuntarily transfer his equitable interest; creditors usually cannot reach the trust interest if the governing instrument contains one (unless for child or spousal support, tax lien holders, and sometimes basic necessities providers).

Question 2

5 Common Charitable Purposes

Answer 2

1. The relief of poverty
2. The advancement of education or religion
3. The promotion of good health
4. Governmental or municipal purposes
5. Other purposes benefiting the community at large or a particular segment of the community

Question 3

What is a discretionary trust?

Answer 3

When the trustee is given complete discretion regarding whether to apply payments of income or principal to the beneficiary; creditors have the same rights as a beneficiary if the trustee exercises discretion to pay.

Question 4

What is the rule regarding delivery for an inter vivos trust?

Answer 4

Although a simple declaration of trust will usually suffice if the settlor is also the trustee, delivery must accompany the declaration if a third-party trustee is named, whereby the settlor parts with dominion and control over the trust property.

Question 5

What is a valid trust purpose?

Answer 5

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, and is possible to achieve.

Question 6

How long does a class remain open?

Answer 6

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).

Question 7

Name and define the most restrictive type of trust.

Answer 7

Mandatory trust: essentially the opposite of a discretionary trust. The trustee of a mandatory trust has no discretion regarding payments; instead, the trust document explains specifically and in detail how and when the trust property is to be distributed.

Question 7

What are the elements of a valid private express trust?

Answer 7

1. Settlor who has a capacity to create a trust
2. Clearly expresses a present intent to transfer ownership of
3. Property to
4. A trustee who has duties to perform
5. For the benefit of one or definite or ascertainable beneficiaries
6. For a valid purpose

Question 8

What is a legally enforceable trust that is not created for charitable purposes but has no definite human beneficiaries (such as animal trusts and noncharitable purpose trusts)?

Answer 8

Honorary trust

Question 9

What are the exceptions to the rule regarding ascertainable beneficiaries?

Answer 9

• Unborn children
• Charitable trusts

Question 10

What is a pour-over devise?

Answer 10

A pour-over devise 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.

Question 11

What is a “secret” trust?

Answer 11

It looks like a testamentary gift, but it is created in reliance on the named beneficiary’s promise to hold and administer the property for another; if the promise is proven by clear and convincing evidence, then a constructive trust is imposed on the property for the intended beneficiary, so as to prevent the unjust enrichment of the “secret” trustee.

Question 12

What must be true for a trust purpose to be considered charitable?

Answer 12

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 the membership in which varies.

Question 13

When must the manifestation of intent occur?

Answer 13

The manifestation of intent must occur either prior to or simultaneously with the transfer of property.

Question 14

What is a “semi-secret” trust?

Answer 14

A semi-secret trust occurs when 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; extrinsic evidence may not be presented, the gift fails, and a resulting trust is imposed on the property to be held in trust for the testator’s heirs.

Question 15

Why must beneficiaries of a private trust be ascertainable?

Answer 15

So that the equitable interest can be transferred automatically by operation of law and directly benefit the person.

Note that the settlor may refer to acts of independent significance when identifying trust beneficiaries.

Question 16

How can a person accept a trusteeship?

Answer 16

A person designated as a trustee can accept the position by substantially complying with a method of acceptance provided for in the terms of the trust.

If the terms of the trust do not provide a method of acceptance, or the method is not made exclusive, then (i) by accepting delivery of the trust property, (ii) exercising powers as a trustee, (iii) performing duties as a trustee, or (iv) otherwise indicating acceptance of the trusteeship.

Question 17

How does a testamentary trust occur?

Answer 17

Testamentary trusts occur when the terms of the trust are contained in writing in a will or in a document incorporated by reference into a will.

Question 17

Support trust

Answer 17

What kind of trust directs the trustee to use her discretion to pay income or principal as necessary to support the trust beneficiary while preventing creditors from reaching the assets unless providing a necessity to the beneficiary?

Question 18

What is a precatory trust

Answer 18

When a donor transfers property to a donee using language that expresses a hope or wish (rather than creating a legal obligation) that such property be used for the benefit of another.

Question 18

Do the majority of jurisdictions presume that a trust is revocable or irrevocable?

Answer 18

In most jurisdictions, a trust is presumed to be revocable unless it expressly states that it is irrevocable.

Question 19

What are the methods for revoking a trust?

Answer 19

1. By substantial compliance with a method provided in terms of the trust.

If no method is provided in the trust, then:
2. By a later will / codicil that expressly refers to the trust or specifically devises property that otherwise would have passed according to the terms of the trust; or

3. By any other method manifesting clear and convincing evidence of the settlor’s intent.

Question 20

When can a noncharitable irrevocable trust be modified or terminated?

Answer 20

1. By the consent of all beneficiaries if a court concludes that the trust continuance of the trust is not necessary to achieve any material purpose of the trust or that modification is not inconsistent with a material purpose of the trust
2. By the consent of all beneficiaries and the settlor even though the modification or termination is inconsistent with a material purpose of the trust

Question 21

What is the cy pres doctrine?

Answer 21

Under the cy pres doctrine, a court may modify a charitable trust to seek an alternative charitable purpose if the original charitable purpose becomes illegal, impracticable, or impossible to perform.

Question 22

When does a trust terminate automatically?

Answer 22

1. When it is revoked or expires pursuant to its terms
2. When no purpose of the trust remains to be achieved
3. When the purposes of the trust have become unlawful, contrary to public policy, or impossible to achieve.

Question 23

In what five instances can a court modify or terminate a trust?

Answer 23

1. Unanticipated changes
2. Inability to administer the trust effectively
3. Trust becomes uneconomic
4. To correct mistakes
5. To achieve the settlor’s tax objectives