Trusts

Question 1

parties to trust & trust overview

Answer 1

grantor/settlor: the creator of the trust

trustee: holds legal interest or title to trust property
beneficiaries: receive the benefits of the trust
* trusts are subject to RAP (not charitable trusts); wait & see approach

Revocable versus Irrevocable Trusts

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

Majority and Uniform Trust Code (UTC): a trust is presumed revocable unless it expressly states otherwise.

• A revocable trust can be terminated (or modified) by the settlor at any time. An irrevocable trust usually cannot be terminated.

Question 2

express trusts overview

-private express trust
–> inter vivos trust
–> testamentary trust

-charitable trust

Answer 2

settlor expressly indicates the intent to create a trust (may be private or charitable)

• intent
• trust property
• valid trust purpose
• ascertainable beneficiaries
• writing

Question 3

inter vivos trust

Answer 3

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

The trustor can designate himself or a third party as the 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

A will may “pour over” assets into a trust, even if the trust is not in existence when the will is executed; later amendments to the trust are also valid.

Inter vivos trust does not need to be executed with the same formalities as a will

*In some jurisdictions, the surviving spouse can set aside inter vivos transfers made by the decedent during marriage, without spousal consent, if the decedent initiated the transfer within one year of her death, retained an interest in the property, or received less than adequate consideration. Here, the husband may be able to argue that Settlor retained an interest in the trust property because she could have terminated the trust at any time prior to her death. If this jurisdiction recognizes that claim, husband should make the election against Settlor’s total $600,000 estate.

Question 4

testamentary trust

Answer 4

Created in writing in a will or in a document incorporated by reference into a will.

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

Question 5

intent

Answer 5

The settlor must intend to make a gift in trust.

The settlor’s intent may be manifested orally, in writing, or by conduct.

• watch out for
• “hope” or “wish” language that donee use it in certain way - doesn’t create a trust
• distinguish from gift, bifurcated transfer

Question 6

trust property

Answer 6

When the trust is created, there must be some property that is put into the trust.

May be real property, money, personal property, intangibles, partial interests, or future interests (whether vested or contingent)

*If a trust is invalid due to lack of property being put into it when it is first created, and the settlor later puts property into the trust and manifests intent to create the trust at the time the settlor put the property in, it will be a valid trust.

Question 7

valid trust purpose

Answer 7

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.

Terms that violate public policy will be stricken from the trust; the trust will not fail overall unless the removal of the terms is fatal.

Trust provisions that restrain a first marriage have generally been held to violate public policy.

A restraint on marriage might be upheld if the trustee’s motive was merely to provide support for a beneficiary while the beneficiary is single.

A restriction on a surviving spouse remarrying after the death of the settlor is likely to be upheld.

Question 8

ascertainable beneficiaries

Answer 8

The beneficiaries must be identifiable.
- The settlor may refer to outside writings or acts to identify beneficiaries.

Exceptions to identifiable beneficiaries:
- Indefinite Class: Trustee can select a beneficiary from an indefinite class (e.g., “my friends”), unless the trustee must distribute equally to all members of the indefinite class (not valid).
- 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: Trusts for a reasonably definite class (e.g., “my brothers,” or “my grandchildren”) will be upheld.
- Charitable trusts: Must not have individual ascertainable beneficiaries.

Question 9

Writing

Answer 9

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.

Question 10

Charitable Trusts

Answer 10

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

(1) Charitable Purpose: Purposes considered to be charitable include the relief of poverty, the advancement of education or religion, govenrment and municipal purposes, and other purposes benefiting the community at large or a particular segment of the community.

*Funding a specific political party is not a charitable purpose.

*For public-policy reasons, charitable trusts are usually construed quite liberally by the courts. The modern trend it to characterize a trust as charitable, if possible.

(2) Indefinite Beneficiaries: Must benefit the community at large, or a class comprising unidentifiable members, not a named individual or a narrow group of individuals

*Charitable trusts are not subject to the Rule Against Perpetuities.

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

*However, under both the Uniform Trust Code and the Restatement (Third), there is a rebuttable presumption that the settlor had a general charitable purpose.

Question 11

Remedial Trusts - Resulting Trust

Answer 11

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 12

beneficiary/creditor rights to distribution overview

Answer 12

• income beneficiaries
• remainder beneficiary
• creditors
• alienation
• support trust
• discretionary trust
• mandatory trust
• spendthrift trust

Question 13

income beneficiaries

Answer 13

receive income from the trust (e.g. profits from business held by trust)

Question 14

remainder beneficiary

Answer 14

entitled to the trust principal upon termination of trust

Question 15

creditors

Answer 15

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 16

alienation

Answer 16

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.

Question 17

support trust

Answer 17

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, except to the extent that a provider of a necessity to the beneficiary can be paid directly by the trustee.

Question 18

discretionary trust

Answer 18

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.

*The trustee of a discretionary trust nevertheless has a duty to administer the trust in good faith, in accordance with its terms and purposes, and in the interest of the beneficiaries.

Question 19

mandatory trust

Answer 19

Trustee has no discretion; the trust governs when trust property is to be distributed.

Question 20

spendthrift trust

Answer 20

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 holders of federal or state tax liens.

Question 21

trust modification & termination overview

Answer 21

• Settlor’s Power to Revoke or Amend
• Beneficiaries
• Trustee
• Court

Question 22

Settlor’s Power to Revoke or Amend

Answer 22

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.

(1) Express revocation in writing or by physical act
- 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.

(2) Automatic Termination
- Expires by its own terms, there is no purpose left, or if the purpose has become unlawful

Question 24

Beneficiaries’ Power to Revoke or Amend

Answer 24

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.

*Should the trust be terminated, title would merge and would vest in the beneficiaries. Thus, if the trust here was terminable and the trustee distributed the trust principal pursuant to the beneficiaries’ directions, the trustee would not be violating any fiduciary duty. The beneficiaries would be entitled to distribute trust proceeds as they saw fit.

Question 25

Trustee’s Power to Revoke or Amend

Answer 25

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 26

Court’s Power to Revoke or Amend

Answer 26

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

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 or uneconomic.

Question 27

Vested Remainder

Answer 27

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

*A remainder is vested if the holder of the interest is ascertainable and there is no express condition precedent required before the interest becomes possessory. In this case, under the terms of the trust, Albert had a lifetime interest in receiving income from the trust while Betty had a remainder interest in the trust principal. Betty’s remainder was vested because she was identified as the beneficiary and her interest was not subject to any conditions precedent (such as a survivorship contingency). Because Betty’s interest was vested, it passed to her estate upon her death. Thus, Betty’s husband is entitled to the trust principal under the terms of Betty’s will.

Note that the result would have been different if Betty’s interest were conditioned on her surviving Albert because she predeceased him. In that case, the interest would not have vested and would not pass to Betty’s estate or her heirs. Instead, the testator would have a reversion that would pass to his son as his heir.
-no need to talk about lapse or anti-lapse because she outlived testator, just didn’t outlive income beneficiary.

Question 28

Disclaimer

Answer 28

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).

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

Question 29

Class Gifts

Answer 29

Class gifts are generally permissible: to “my children” or “my grandchildren” (includes adopted)

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/life estate holder dies.

Class Gifts to “Surviving” Children:
- 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.

When an inter vivos trust specifies the beneficiaries as the settlor’s “surviving children,” but there is an intermediary interest in another party for a term of years, the question arises whether “surviving” refers to the life of the settlor or the expiration of the other interest, should the settlor die before such expiration.
-minority/common law: The deceased child’s estate takes the interest (vests at the settlor’s death).
-UPC: goes to deceased child’s issue

Question 30

Lapse of a Gift

Answer 30

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

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

*If an essay does not specify the approach, talk about what the result would be in a majority of states and under the UPC.

Question 31

Trustee Powers

Answer 31

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 32

Trustee Duties Overview

Answer 32

• duty of loyalty
• duty of prudence
• other duties

Question 33

Duty of Loyalty

Answer 33

Duty to administer trust in good faith (subjective standard) and to act reasonably (objective standard-talk about duty of care).

(1) Self-Dealing: 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.

Prohibited transactions:
- 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.

Exceptions: Even when self-dealing is authorized (by settlor, court order, or all beneficiaries), transaction must still be reasonable and fair to avoid liability for breach.

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

(2) Conflict of Interest:

-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 34

Duty of Prudence

Answer 34

(1) 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.

(2) Duty to be Impartial: Balance interests of the present beneficiaries and treat them equally unless the trust provides otherwise.
-The trustee must balance the interests of the present and future beneficiaries.

(3) Allocation of Principal and Income: 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.

*There may be one set of facts that trigger multiple duties of prudence. To maximize your points, talk about each duty that’s violated under its own IRAC.

Question 35

Other Duties

Answer 35

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 36

Powers of Appointment

Answer 36

A trustee with the power of appointment gets the power to distribute the trust property. (settlor can also give herself general or specific power of appointment in trust instrument to be done later in her will)

General Power of Appointment: the trustee can give the property to anyone, including herself.

Special/Limited Power of Appointment: the trustee must give the property to a specific person (e.g., to grandkids, to “heirs at law”).

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.

*When one with a power of appointment makes an appointment that exceeds the grant given to him, other valid appointments are not invalidated, but the property or interest that was invalidly appointed passes to the “taker in default of appointment”—that party who would have received the interest in the absence of any appointment.

*When a donee of a special power of appointment fails to exercise the power, the property or interest passes to the takers in default of appointment as specified in the trust instrument. To the extent that the donor did not provide for takers in default or the instrument does not have an effective gift-in-default clause, the unappointed property passes to the permissible appointees living when the power lapses if: (1) the permissible appointees are a defined and limited class, and (2) the donor has not manifested an intent that the permissible appointees receive the appointive property only so far as the donee elects to appoint it to them.

*A special power of appointment allows the donor to specify certain individuals or groups as the objects of the power, to the exclusion of others. The power can be limited as to recipient and time of exercising. The donee of a power of appointment can direct the appointment of an interest of equal or lesser value to that specified in the power given to him, unless there is evidence that the donor intended otherwise. Thus, if a donee can appoint trust assets outright, then he can also give, for example, a life estate to a permissible beneficiary.

Question 37

Remedies

Answer 37

If a trustee violates any duty, they can be sued by the beneficiaries who can seek damages and/or removal of the trustee due to the breaches.

Question 38

Income vs. Principal

Answer 38

All assets received by a trustee must be allocated to either income or principal. The allocation must be balanced so as to treat present and future trust beneficiaries fairly, unless a different treatment is authorized by the trust instrument. 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.

Question 39

Honorary Trusts

Answer 39

*Discuss if doesn’t meet definition of charitable trust, and not private express trust bc no ascertainable beneficiaries.

An honorary trust is a legally enforceable trust that is not created for charitable purposes but has no definite human beneficiaries. Two types of honorary trusts are recognized by the Uniform Trust Code: animal trusts and noncharitable purpose trusts. Almost all jurisdictions 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. Generally, a noncharitable purpose trust is limited to being enforced for 21 years or subject to the rule against perpetuities.