Trusts

Question 1

To what trusts does the UTC apply to?

Answer 1

The UTC was effective April 1, 2010.

Generally, it applies to all trusts created on, before, or after that date.

Exception: Inter vivos trusts created before 4/1/10 are irrevocable and can’t be amended unless the power to revoke/amend was expressly retained by settlor. / Such trusts created on or after 4/1/10 are revocable/amendable by settlor unless trust expressly made it irrevocable and cannot be amended.

Question 2

What are the requirements for a valid trust?

Answer 2

Say: “To have a valid trust, the SETTLOR DELIVERS TRUST PROPERTY to TRUSTEE for the benefit of BENEFICIARIES with INTENT TO CREATE A TRUST. Trust must be for a LAWFUL PURPOSE.

• Settlor & Trustee must have capacity.
• Trust doesn’t fail b/c lack of Trustee. Court will appoint suitable trustee.

Question 3

The beneficiaries are upset about the Trustee’s management of the trust and seek to remove him. How will the court determine whether to remove them?

Answer 3

Removal on these grounds: (1) serious breach of trust, (2) lack of cooperation among co-trustees that impairs admin, (3) unfitness, unwillingness, or persistent failure to administer effectively, (4) substantial change of circumstances making removal in bene’s best interests. NO: friction or hostility unless so extreme that they trigger above.

Question 4

What if the trustee actually has no powers to manage or active duties to perform? How does this effect a spendthrift trust?

Answer 4

There is no trust if the named trustee has no powers under the Statute of Uses. The beneficiary has full title, not just equitable title. // The spendthrift trust never was effective b/c the trust never came into existence.

Question 5

Who can be a beneficiary?

Answer 5

If a noncharitable trust, beneficiaries must be definite and ascertainable and their interests must vest, if at all, within the RAP. (Bene must be stated in trust!)

If a charitable trust, beneficiary cannot be any identifiable individual and they are not subj. to RAP.

Question 6

How does Michigan construe RAP?

Answer 6

RAP: life in being + 21 years or alt. the wait and see period of 90 years under Uniform Statutory RAP

Question 7

Must there be a writing to create a trust?

Answer 7

Under SOF, trusts of real property need a writing. *Note: if an inter vivos trust, a deed conveying legal title to trustee is also req’d

Oral trusts of existing tangible or intangible personal person are valid, but only if established by CCE.

Question 8

Can the guardian or conservator of the settlor amend or revoke the trust? What about an agent under a durable power of attorney?

Answer 8

ONLY IF: (1) authorized by the trust instrument AND (2) w/court approval.

ONLY IF: (1) authorized by the trust terms or (2) by the POA itself

Question 9

After the settlor died, a will beneficiary contested the validity of a trust whose named beneficiaries did not include the will beneficiary. Can the contestant do this?

Answer 9

After the settlor dies, a trust contestant can file an action within the earlier of (1) two years after the settlor’s death or (2) six months after the trustee gives the contestant written notice of the trust’s existence and a copy of the trust’s terms that affect the person’s interests.

Question 10

If a charitable trust cannot survive (unlawful, impracticable, wasteful, impossible) in it’s current form, what should the court do?

Answer 10

Unless the Trust otherwise provides, apply cy pres.

If the trust states that the property reverts to the settlor if he’s living or to his descendants, it must go back to the settlor if he’s alive or to the descendants so long as less than 50 years had elapsed since the trust was created.

Question 11

Are pet trusts valid?

Answer 11

Yes: (1) animal must be in existence and (2) continues until death of last animal.

If it’s merely an object, the trust is valid for 21 years.

*Note: Court has power to reduce amount of trust assets if too much in trust. Think of Trouble the Poodle & $12 million trust.

Question 12

When would the issue of constructive trust come up?

Answer 12

It’s an equitable remedy designed to address wrongful conduct & unjust enrichment (e.g., a person who was about to be disinherited stopped the T from signing the new will by force.)

(1) Apply the law. Yes will exists! But!!!
(2) Apply equity. Wrongful conduct + unjust enrichment = constructive trust for so-so’s benefit.

Question 13

What is the slayer statute?

Answer 13

A killer forfeits his interest in victim’s estate if he (1) feloniously and (2) intentionally killed the victim. Really applies to any intentional killing.

Treat as if killer predeceased victim.

Question 14

What is a purchase money resulting trust?

Answer 14

Scenario: A pays the purchase price for land, but title is taken in B. AB aren’t related, & A brings suit seeking to impress a resulting trust in his favor, arguing that he didn’t intend to make a gift to B.

Michigan doesn’t recognize a PMRT.

Absent fraud or undue influence, any evidence contradicting recitals in a deed is not admissible. Case closed. PER applies.

Question 15

How is an investment decision judged in the context of trusts?

Answer 15

Under the Uniform Prudent Investor Act, which is based on modern portfolio theory of investing, prudence is measured by conduct when the investment decision was made, not by outcome.

Total return to the trust is the measure, not individual pros & cons.

Question 16

What happens if the Trustee has insufficient trust income to pay all the beneficiaries?

Answer 16

The trustee has the discretion under the Uniform Principal and Income Act to exercise her “adjustment power,” and shift principal to income.

Duty to administer trust impartially based on what is fair and reasonable to all bene’s.

MI says to use a TOC approach.

Question 17

The MTC is a set of default rules. What can’t a trustee change though?

Answer 17

5 Things

1. No illegal purpose inc. illegal or tortious act.
2. Can’t waive Trustee’s liability for bad faith, intentional, or reckless indifferent acts
3. Can’t limit SOL to bring a judicial proceeding.
4. Can’t limit demand for accountings
5. Can’t limit court’s jurisdiction to modify/terminate trust.

Question 18

If a trustee receives a payment from some source, should it be classified as income or principal?

Answer 18

Apply Uniform Principal and Income Act’s TOC approach.

Some are easy: interest income, net rental income.
Harder: [apply adjustment power under UPIA]
(1) Distributions from an entity.
- money goes to income (unless capital gain for federal income tax purposes)
- all receipts other than money goes to principal
(2) Receipts from mineral leases, patents (items that receive income for a limited time)
- 10% Rule –> 10% income / 90% principal

Question 19

What can a trustee do?

Answer 19

YES: give a 99-year lease w/o court approval even if lease goes beyond trust’s termination.
YES: Trustee enters into a phip to drill for oil.

Why? Trustee Powers Act - If a fee simple owner could do it, so can a trustee.

Where no power:

(1) imprudent investment (apply UPIA)
(2) self-dealing

Question 20

What is the Doctrine of Election?

Answer 20

A beneficiary of a trust is estopped from contesting something about the trust when (1) he accepted benefits from the trust (2) despite having reasonable grounds to contest before the benefits.

Question 21

Trust Mod/Term: When can a trust be modified or terminated?

Answer 21

(1) change circumstances
(2) with consent of trustee and qualified beneficiaries
(3) uneconomic trust
(4) reformation to correct mistakes or achieve tax objective

Question 22

Trust Mod/Term: Change Circumstances

Answer 22

On petition of the Trustee or beneficiary, court can modify or terminate the trust, b/c of circumstances not anticipated by the settlor, modification or termination will further the purposes of the trust.

Question 23

Trust Mod/Term: Upon consent of Trustee & Beneficiary

Answer 23

Even if the changed circumstances test is not met, the court (w/the consent of the trustee & QUALIFIED bene’s) may modify a trust if the modification is not inconsistent with the material trust purpose, or terminate a trust if the court finds that continuance is not necessary to achieve any material trust purpose.

Who are qualified bene’s? (1) Permissible bene’s of trust income and principal, & (2) would be distributees if the trust terminate on that date

Question 24

Trust Mod/Term: Uneconomic Trust

Answer 24

If the value of the trust is less than $50,000*, upon giving notice to qualified bene’s, the trustee can terminate a trust w/o court approval if the trustee concludes that the trust’s value is insufficient to justify administration costs.

Question 25

What is the power of appointment?

Answer 25

It allows the beneficiary of a trust to hold a power to grant her interest in the trust (or some version as contemplated in the trust doc) via bene’s will.

If the bene holds a general power of appt., a residuary clause or other general language operates to exercise the power (even if there is no mention of the power) unless:

(1) instrument creating the power made a gift in default of appointment, or
(2) instrument creating the power required the power’s exercise by a specific reference to the power

• Note: the settlor can restrict the class of persons of whom can receive the appointment. IE “Special Testamentary Power of Appointment”
• Note: Bene can’t benefit from selling this appt. to another. It would defeat the purpose of its testamentary nature and make it an inter vivos power.

Question 26

Trust Mod/Term: Reformation to correct mistakes or achieve tax objective

Answer 26

The court may reform the terms of a trust if it is proved by CCE that both the settlor’s intent and the trust terms were affected by a mistake of fact or law. Also, the court may modify the terms of a trust to achieve the settlor’s tax objectives.

Question 27

What is a spendthrift trust?

Answer 27

As a preliminary matter, unless the trust is a spendthrift trust, a beneficiary’s trust interest is freely transferable by the beneficiary and subject to claims of the beneficiary’s creditors.

Defined: a trust which a trust beneficiary cannot voluntarily transfer his interest in & the interest cannot be reached to satisfy creditors’ claims.

*Note: Once income/principal is distributed to the beneficiary, it is no longer protected by the spendthrift provision & the beneficiary’s creditors can reach it.

Question 28

A beneficiary’s interest in a spendthrift trust does not apply as to:

Answer 28

(1) contracts for necessaries
(2) child support obligations
(3) federal tax liens
(4) settlor’s retained interest
(5) property in a revocable trust claimed by settlor’s creditors

As to number (4), spendthrift does not apply at all to settlor’s retained interest. Rationale: improper method to insulate one’s assets from creditors’ claims.

As to number (5), the revocable trust is reachable by the trustee in settlor’s bankruptcy.

If the trust become an irrevocable trust, number (5) does not apply as to the settlor except: if a fraudulent conveyance (i.e., intent was to defraud, defeat, or delay creditors)

Question 29

What other method is there it ward away the claims of creditors?

Answer 29

Create a “pure discretionary trust.” IE Trustee has complete discretion as to how much to pay the beneficiary. Beneficiary’s creditors cannot compel the trustee to make a distribution, even if there is no spendthrift clause.

Note: can create a “support trust” too, which will provide guidelines for the trustee to follow as to how/when to provide distributions. A beneficiary’s creditor or beneficiary himself may be able to compel a distribution up to that threshold, but the court will consider the other resources available to beneficiary.