Trust Essay Rules

Question 1

Is a trust presumed to be revocable or irrevocable?

Answer 1

Traditional rule is presumed to be irrevocable unless it expressly states otherwise.

Modern/UTC rule is that a trust is presumed to be revocable unless it expressly states otherwise.

Question 2

Mandatory vs. Discretionary Trusts

Answer 2

A mandatory trust requires the trustee to distribute all trust income.

A discretionary trust allows the trustee to distribute income at their discretion. To challenge the trustee an abuse of discretion must be shown.

Question 3

Rules Against Perpetuities

Answer 3

Charitable trusts are not subject to RAP

Trusts are subject to RAP.

Question 4

Parties to a trust

Answer 4

Grantor/Settlor is the creator of the trust

Trustee holds legal interest or title to the trust property.

Beneficiaries receive the benefit the trust.

Income Beneficiaries receive income from the trust such as profits from the business. A remainder beneficiary is entitled to the trust principal upon termination of the trust.

ID the types of beneficiaries on an essay

Question 5

Private Express Trusts

Answer 5

If the facts say a valid trusts is formed don’t discuss formalities.

A private express trust clearly states the intention of the settlor to transfer property to a trustee for the benefit of one or more ascertainable beneficiaries.

Question 6

Express Trust requirements

Answer 6

1) Intent: The settlor must intend to make a gift in trust. Intent may be manifested orally, by conduct, or in writing.

2) Trust Property: At creation some property must be put in the trust; can be real, personal, future interests, or intangibles.

If no property is put in when the trust is created, making it invalid, but property is later put it and the settlor manifests intent to create the trust at the time property is put in, then a valid trust will form.

3) Valid Trust Purpose: Anything not illegal/not against public policy

4) Ascertainable Beneficiaries
- Rule—beneficiaries must be identifiable by name so that the equitable interest can be transferred automatically by operation of law and directly benefit the person; the settlor may refer to acts of independent significance to identify the beneficiaries

Exceptions—trusts for the benefit of unborn children or to a reasonably definite class will be upheld, and charitable trusts (trusts that exist for the good of the public
at large) do not need individual ascertainable beneficiaries

Question 7

Precatory Trust

Answer 7

If 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, then the gift may be considered a precatory trust and not an outright gift. To be considered a precatory trust, the transfer must meet two requirements.

First, it must contain specific instructions to a fiduciary. Second, it must be shown that, absent imposition of a trust, there would be an unnatural disposition of the donor’s property because of familial relations or a history of support between the donor and the intended beneficiary.

Question 8

Valid Trust Purpose

Answer 8

A trust can be for any purpose as long as it is not illegal, restricted by rule of law, or against public policy. Terms that violate public policy will be stricken from the trust; but the trust will not fail overall unless removal of that term is fatal.

Ex: If son gets married he loses rights to the trust’s income. This will be stricken as against public policy unless the purpose is only to provide until someone gets married. A restriction on a surviving spouse remarrying is likely to be upheld.

Question 9

Ascertainable beneficiaries

Answer 9

The beneficiaries must be identifiable and the settlor may refer to outside writings or acts to identify them.

Exceptions:

Unborn children: Trusts for the benefit of unborn children are valid, even though the beneficiaries are not yet ascertainable at the time the trust is created.

Class Gifts: A trust to a reasonably definite class will be enforced. Even a trust that allows the trustee to select the beneficiaries from among the members of a class is acceptable, but a trust to an entirely indefinite class will not be enforced as a private trust. Trusts for a reasonably definite class (e.g., “my brothers,” or “my grandchildren”) will be upheld. Under the Uniform Trust Code (UTC), a trustee can select a beneficiary from an indefinite class, unless the trustee must distribute equally to all members of an indefinite class

Charitable trusts: Must not have individual ascertainable beneficiaries.

Question 10

Writing requirements of trusts

Answer 10

If trust involves real property, it must be in writing to comply with the Statute of Frauds.

If the trust is a testamentary trust (takes effect upon the death of settlor) then the testamentary trust does need to meet the statute of wills in the jurisdiction, which may
mean it needs to be in writing and meet other requirement (e.g., signed with witnesses).

Otherwise, no writing is required to find a trust.

Example: If a settlor transferred personal property to a trust and the trust later distributes it, it does not have to be in writing.

**If dealing with a nontestamentary trust, or an amendment to a
nontestamentary trust, there is no requirement that will formalities be met.

Question 11

Inter Vivos Trusts

Pour over provisions

Answer 11

An inter vivos trust is a trust created while the trustor is living that transfers some or all of their property into a trust.

The Trustor can designate himself or another as trustee.

Pour-Over Provision: A provision in a will that directs the distribution of property to a trust, so that the property passes according to the terms of the trust.

(Recently Tested): A will may “pour over” assets into a trust, even if the trust is not in existence when the will is executed; the trusts can be created later; later amendments to the trust are also valid. AND Inter vivos trusts and their amendments do do not need to be executed with the same formalities as a will.

Question 12

Testamentary Trust

Answer 12

Created in writing in a will or in a document incorporated by reference into a will. Takes effect upon the death of the testator.

The will containing the trust must meet the attested or holographic will requirements.

Question 13

Charitable Trusts

Answer 13

Must have a stated charitable purpose for the benefit of the community at large or for a large class of persons.

Purposes considered to be charitable include the relief of poverty, the advancement of education or religion, and other purposes benefiting the community at large or a particular segment of the community.

Funding political parties are not charitable.

Question 14

Does a charitable trust have to have ascertained beneficiaries?

Are they subject to RAP

Answer 14

Must have indefinite beneficiaries

Must benefit the community at large, or a class comprising unidentifiable members, not a named individual or a narrow group of individuals

Not Subject to Rap

Question 15

Cy Pres Doctrine

Answer 15

A court may modify a charitable trust to seek an alternative charitable purpose if the original one becomes illegal, impracticable, or impossible to perform.

Exam Tip 10: Look for facts indicating that a trust was created for the benefit of a charity that no longer exists (such as a retirement home, college or university, or zoo). There will usually be a similar charity that is in existence and it will ask the court to modify the trust and substitute it as the beneficiary of the trust.

Question 16

Cy Pres Specific and General Intent

Answer 16

Specific or General Intent: A court will analyze whether the trust has a specific intent to help one charity or a general intent to help charity.

If there is specific intent, the court may not modify the trust; the trust will be terminated and become a resulting trust.

If there is general intent, the court will substitute a similar charity.

To earn full credit, analyze whether the trustor intended for the trust to only benefit one specific charity (such as one specific retirement home), or if the trustor intended to generally benefit charity (all retirement homes).

If something fails as a charitable trust, it may be viewed as an honorary trust.

In an effort to carry out the testator’s intent, 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. The settlor’s intent controls. If it appears that the settlor would not have wished that an alternative charitable purpose be selected, the trust property may instead be subject to a resulting trust for the benefit of the settlor’s estate. However, , there is a rebuttable presumption that the settlor had a general charitable purpose.

Question 17

Honorary Trusts

Answer 17

no private beneficiaries (usually for pet or noncharitable purpose)

From outline:
An honorary trust is a legally enforceable trust that is not created for charitable purposes but has no definite human beneficiaries. Traditionally, because such a trust lacked a beneficiary who was capable of enforcing the terms of the trust, the trustee was not legally bound to comply with the settlor’s directions, but instead was on her honor to do so,

Because the beneficiary of a private trust must be capable of taking and holding property, an animal may not be the direct beneficiary of a private trust. However, all jurisdictions permit the creation of a trust for the care of one or more animals alive during the settlor’s lifetime. An animal trust may be enforced by a person appointed in the terms of the trust (trust director) or, if no person is so appointed, by a person appointed by the court. A person having an interest in the welfare of the animal may request the court to appoint a person to enforce the trust or to remove a person appointed. UTC § 408(b); Uniform Directed Trust Act (UDTA) § 6, cmt.

Almost all jurisdictions also permit the creation of a trust for a noncharitable purpose without a definite or definitely ascertainable beneficiary or for a noncharitable but otherwise valid purpose to be selected by the trustee. UTC § 409. For example, a settlor can create a testamentary trust to fund the saying of prayers for the settlor or to maintain the settlor’s grave. A settlor can also create a trust that gives the trustee the discretion to choose worthy purposes to receive the income from the trust on an annual basis, even though some of those purposes would not qualify as charitable purposes.

Question 18

Remedial Trusts

Answer 18

A resulting trusts created out of equity.

If a trust fails in some way or when there is an incomplete disposition of trust property, a court may create a resulting trust requiring the holder of the property to return it to the settlor or to the settlor’s estate.

Question 19

Beneficiary Rights

Answer 19

Income Beneficiaries: Receive income from the trust

Remainder Beneficiaries: Entitled to the trust principal upon termination of the trust

Question 20

Can creditors reach the trust

Answer 20

Creditors (Recently tested): A beneficiary’s creditors may reach trust principal or income only when those amounts become payable to the beneficiary or are subject to their demand.

Question 21

Alienation of trust interest

Answer 21

A beneficiary’s equitable interest in trust property is freely alienable (it can be sold or used as collateral for a loan) unless a statute or trust instrument limits this right.

A beneficiary can sell their rights to the trusts.

Question 22

Creditors and Support Trusts

Answer 22

A support trust directs the trustee to pay income or principal as necessary to support the trust beneficiary (e.g., maintaining standard of living, healthcare, or child support costs).

Creditors cannot reach the assets of a support trust unless they are providing a necessity to the beneficiary and then he trustee can pay them directly

Ex: If they are providing the healthcare they could get paid by the trustee.

Question 23

Creditors rights to discretionary trusts

Answer 23

The trustee is given complete discretion regarding whether or not to apply payments of income or principal to the beneficiary.

If the trustee exercises his discretion to pay, then the beneficiary’s creditors have the same rights as the beneficiary, unless a spendthrift restriction exists.

If the discretion to pay is not exercised, then the beneficiary’s interest cannot be reached by his creditors.

The beneficiary of a fully discretionary trust lacks standing to challenge the actions or inactions of the trustee unless there is a clear abuse of discretion.

A trust can be discretionary and a support

Question 24

Mandatory Trusts

Answer 24

Trustee has no discretion and must distribute property as the trust governs.

Question 25

Spendthrift Trusts

Answer 25

A spendthrift trust expressly restricts beneficiary’s power to voluntarily or involuntarily transfer their equitable interest (i.e., spendthrift clause).

Creditors usually cannot reach the trust interest, unless money is owed for child or spousal support, or to basic necessities providers, or tax lien holders.

Question 26

Settlor’s Power to Revoke or Amend Trusts

Answer 26

If the settlor has the power to revoke the trust, they also have the power to modify or amend the trust.

Majority rule—trusts are presumed to be revocable and amendable unless there is a writing to the contrary.

Question 27

Express revocation in writing or by physical act

Answer 27

Effective when the actual event occurs if there is intent along with the event

Amendments to nontestamentary trusts do not have to be executed with the same formalities of a will.

Question 28

Automatic Termination

Answer 28

Expires by its own terms, there is no purpose left, or if the purpose has become unlawful.

Question 29

Beneficiaries rights to modify or terminate trusts.

Answer 29

A noncharitable irrevocable trust can be terminated or modified by consent of all beneficiaries if a court concludes that continuance is not necessary to achieve any material purpose of the trust.

The most common example of a trust that has an unfulfilled material purpose is one that has both income and remainder beneficiaries; both the present and the future beneficiaries
must agree for the trust to be terminated prematurely.

A noncharitable irrevocable trust can be terminated by consent of all the beneficiaries AND the settlor, even if termination is inconsistent with a material purpose of the trust.

Question 30

Trustee’s power to terminate/modify

Removal of trustee

Answer 30

Generally, a trustee does not have the power to terminate the trust, unless the trust contains express termination provisions.

Removal of Trustee—a court can remove a trustee if the purpose of the trust would be frustrated by the trustee’s continuance in office or if the trustee violated a duty.

Question 31

Court modification of trusts

Answer 31

Unanticipated Changes—a court can modify the administrative or dispositive terms of a trust or terminate it if because of circumstances not anticipated by the settlor, modification or termination would further the purpose of the trust.

Inability to administer trust effectively is another reason a court could modify/terminate a trust.

A court may modify a trust if events that were unanticipated by the settlor have occurred and the changes would further the purposes of the trust. To the extent possible, the modification must be made in accordance with the settlor’s probable intention, and the court need not seek beneficiary consent to make the modification.

Even if circumstances have not changed in an unanticipated manner, a court may modify the terms of a trust that relate to the management of trust property if continuing the trust on its existing terms would be impracticable, wasteful, or impair the trust’s administration.

Question 32

Vested Remainders

Answer 32

A remainder is consider vested if the holder of the interest is ascertainable and there is no express condition precedent required for the interest to become possessory.

Question 33

Example of Vested Remainder: A testator creates a valid testamentary trust. Under the terms of
the trust, “all trust income to be paid to my brother John during his lifetime, and upon John’s death, all trust principal to be distributed to my nephew, Dave.

Answer 33

Analysis: John gets income while he is alive. John has a lifetime interest, and he is the income beneficiary of the trust. Dave has a future vested remainder interest in the principal of the trust. His interest is vested because he was identified as the beneficiary and is not subject to any conditions precedent.

Question 34

Disclaimer by beneficiaries of trusts

Answer 34

In most states, a disclaimer is not effective unless it is in writing within nine months after the future interest would become “indefeasibly vested.”

If the income beneficiary of a trust disclaims her interest, then the trust principal becomes immediately distributable (accelerates) to the remainder beneficiaries if the remainder is vested (if the remainder is contingent upon a condition, the remainder will not accelerate).

Question 35

Disclaimer Example 12: A testator creates a valid testamentary trust. Under the terms of
the trust, all trust income would be paid to the testator’s son during his lifetime, and upon his death, the trust assets would be distributed to the testator’s grandson. The testator dies. One week later, the testator’s son effectively disclaims his interest in the trust income.

Answer 35

Analysis: Because the testator’s son is the income beneficiary and effectively
disclaimed his income interest, the trust principal is automatically distributable to the grandson (the remainder beneficiary) because the grandson’s interest is vested (there is no contingency that must be met here)

Question 36

Future interest Disclaimer Example
A testator creates a valid testamentary trust. Under the terms of the trust, all trust income would be paid to the testator’s son during his lifetime, and upon his death, the trust assets would be distributed to the testator’s grandson. The testator dies. Within nine months, the testator’s grandson effectively disclaims his future interest in the trust principal.

Answer 36

When the holder of a future interest effectively disclaims that interest, the disclaimant is deemed to have predeceased the life tenant.

Analysis: The income from the trust is paid to the son for as long as he lives. When the son dies, because the grandson effectively disclaimed his interest, the trust principal reverts back to the testator’s estate or, if the anti-lapse rules apply, the trust principal will go to the grandson’s issue.

In most states, a disclaimer is not effective unless it is reduced to writing within nine months after the future interest would become “indefeasibly vested.” For a revocable trust or a testamentary trust, the future interest in a named beneficiary becomes “indefeasibly vested” when the settlor dies. When the holder of a future interest effectively disclaims that interest, the disclaimant is deemed to have predeceased the life tenant.

Question 37

Class Gifts

Answer 37

Class gifts are generally permissible: to “my children” or “my grandchildren”

this will include adopted children

A class remains open and can admit new members after the trust is created until at least one class member is entitled to possession or the settlor dies.

Question 38

Class gift
Example 14: A settlor places her assets in a trust. The terms of the trust provide that the trust principal is to be paid on her death to her surviving grandchildren equally. At the time of the creation of the trust, the settlor had three grandchildren, A, B, and C. At the time of her death, she also had a fourth grandchild, D

Answer 38

Analysis: The class is settlor’s grandchildren. D was born after creation of the trust, but before any of the other grandchildren were entitled to payment and before the settlor died. Therefore, D will be considered to be part of that class.

Question 39

Class Gifts to “Surviving” Children—see outline for details.

Answer 39

Unless the trust instrument provides otherwise, the general rule is that a class gift from a parent to surviving children is limited to only the children that outlive the settlor.

If the child predeceases the settlor, the child would take nothing.

The UPC takes a different approach (look at your outline for details on this).

Question 40

Lapse of a gift

Answer 40

In most states, anti-lapse statutes do not apply to trusts.

If a parent leaves items through a trusts to a child and the die before the parent then the child would not take the gift.

Under the UPC, anti-lapse is applied to trusts. A substitute gift is created in the descendants of the deceased issue.

Mention both

Question 41

Trustee’s Powers and Duties

Answer 41

The trustee has powers granted expressly in the trust, and powers necessary to act as a reasonably prudent person in managing the trust, including the implied power to contract, sell, lease, or transfer the trust property.

Question 42

Trustee’s Duty of Loyalty

Answer 42

Duty to administer trust in good faith (subjective standard) and to act reasonably (objective standard).

Question 43

Self-Dealing by Trustee

Answer 43

When the trustee personally engages in a transaction involving trust property, a conflict of interest arises between the trustee’s duties and her own personal interest.

Buying/selling trust assets;
* Selling property between trusts that trustee manages;
* Borrowing from or making loans to trust;
* Using trust assets to secure personal loan;
* Engaging in prohibited transactions with friends/relatives; or
* Otherwise acting for personal gain through trustee position

There is an irrebuttable presumption that trustee breached duty of loyalty when self dealing is an issue.

No further inquiry into trustee’s reasonableness or good faith is required because self-dealing is a per se breach.

Exception: If the trust itself; all beneficiaries; or a court authorizes the self dealing, it must still be fair or reasonable

Question 44

Remedy for Self Dealing

Answer 44

The beneficiaries can set aside the transaction or ratify the transaction and recover the profits from the transaction.

Question 45

Trustee Conflict of Interest

Answer 45

When a trustee invests trust assets in a corporation in which the trustee has an interest (for example, owns stock in the corporation) that might affect the trustee’s judgment, a conflict of interest arises.

There is a presumption of a breach of the duty of loyalty that can be rebutted by showing that the terms of the transaction were fair or that the transaction would have been made by an independent party.

Question 46

Duty of Prudence

Answer 46

Exam Tip: Multiple duties may be triggered. Exam each in different IRACS

Question 47

Duty of Prudence: duties related to investments

Answer 47

Investments
Prudent Investor Rule: Requires trustee to act as a prudent investor would act when investing his own property; trustee must exercise reasonable care, caution, and skill when investing and managing trust assets.

Duty to Diversify: Trustee must adequately diversify the trust to spread the risk of loss. The trustee should not be investing in only one stock and should invest in multiple.

Duty to Make Property Productive: This can apply to investments but can also apply to property that the trust owns. This can apply to other property such as rental property.

These are separate duties.

Question 48

Trustees Duty to be Impartial

Answer 48

Balance interests of the present beneficiaries and treat them equally unless the trust provides otherwise.

Example 18: Settlor’s trust states that Trustee is to equally distribute the rent
from an apartment to S’s three children, A, B, and C. A suffers from a health condition and is unable to work. Trustee distributes 2/3 of the rent from the apartment to A and only 1/3 to B and C. Trustee has breached his duty of impartiality.

The trustee must balance the interests of the present and future beneficiaries.

Example 19: Settlor’s trust states that A and B are to receive the income for life
(present income beneficiaries) and upon their death all of the trust assets are to go to C (remainder beneficiary). Trustee invests the trust money into a high-risk stock that pays frequent and substantial dividends (trust income), but the stock decreases in value by 50%. The present income beneficiaries, A and B, are receiving high income, but C, the remainder beneficiaries will receive a reduced principal; this would be a breach of duty of impartiality.

Question 49

Allocation of Principal and Income

Answer 49

If ordinary expenses occur involving trust property, those ordinary expenses are charged to the income generated by the trust. Extraordinary
expenses should be charged to the trust principal.

This could violate duty of impartiality if not followed

Question 50

Other Duties

Answer 50

Duty to Disclose: Disclose complete and accurate information about nature and extent of the trust property, including allowing access to trust records and accounts.

Duty to Account: Periodically account for actions taken on behalf of the trust.

Question 51

Powers of Appointment

Answer 51

A trustee with the power of appointment gets the power to distribute the trust property.

General Power of Appointment—the trustee can give the property to anyone.

Special/Limited Power of Appointment—the trustee must give the property to a specific person (e.g., to grandkids).

If the person exceeds the bounds of the power of appointment or does not exercise it at all, the property they were supposed to give to someone will either go back to the estate or be
distributed in a different way.

Question 52

Powers of Appointment Example 21:

Settlor creates a valid trust directing the trustee to pay the income “to my son Mark, for life and to distribute the principal upon Mark’s death to any or all of his children as he appoints by his will.” The trust further says “in the absence of a valid appointment, upon Mark’s death, distribute the
principal to Law School.” Later, Mark executes a will appointing the trust principal to his wife only.

Answer 52

Analysis: Mark has received a special power of appointment that allows him to distribute or appoint the trust principal to any or all his children through his will. The execution of the will appointing the principal to his wife is outside of the scope of his special appointment and is going to be invalidated. Instead, the trust principal will go to the “taker in default,” which is Law School

Analysis: Mark has received a special power of appointment that allows him to distribute or appoint the trust principal to any or all his children through his will. The execution of the will appointing the principal to his wife is outside of the scope of his special appointment and is going to be invalidated. Instead, the trust principal will go to the “taker in default,” which is Law School.

Question 53

Allocation of income vs principal

Answer 53

All assets of a trust must be allocated as either income or principal. The allocation must be balanced so that present and future trust beneficiaries are treated fairly, unless a different treatment is authorized by the trust.

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, 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.

Ex: $30,000 in rents received from the office building and the $20,000 in cash dividends both constitute money that is generated by the trust property. Thus, they should be characterized as trust income. However, the $700,000 proceeds from selling the office building constitutes money generated in connection with a conveyance of trust property, and should be characterized as trust principal. The 400 shares in stock dividends should be treated as trust principal under the UPAIA.