Trusts

Question 1

Trust

Answer 1

Trustee holds legal title to property for benefit of beneficiaries. Requires settlor/creator deliver legal title of the trust property (res) to trustee for benefit of beneficiaries with intent to create a trust for a valid purpose.

Question 2

Self-Declaration of Trust

Answer 2

Settlor declares themself trustee of own property for benefit of others.

Question 3

Testamentary Trust

Answer 3

Created by settlor’s will. No delivery requirement.

Question 4

Trust Purpose

Answer 4

Can be created for any purpose that is not illegal, contrary to public policy, or impossible.

Question 5

Power of Appointment

Answer 5

Doesn’t require ascertainable beneficiaries like a trust does.

A trust invalid for want of indefinite beneficiaries can still be given effect as power of appointment.

Question 6

Ascertainable Beneficiaries

Answer 6

Private trusts require ascertainable beneficiaries, but charitable trusts do not. Beneficiaries need not be alive, just ascertainable.

Example: “to B’s children” is ascertainable, even if B currently has no kids. If B never has kids, it will create a resulting trust and the property goes back to the settlor.

Question 7

Honorary Trust

Answer 7

No charitable purpose or private beneficiary. Used and valid for life of a pet or for maintaining cemetery plot.

Invalid at common law for violating RAP.

Question 8

Pour-Over Clause

Answer 8

Clause in will that leaves property at settlor’s death to a previously created trust.

Requirements: trust must be identified in the will, and terms must be set out in a written instrument, which can be executed before, concurrently with, or after the will itself is executed.

Question 9

Totten Trust

Answer 9

(“Payable on Death” account)

Settlor/grantor places money in bank account with instructions that upon settlor’s death, whatever’s in the account will pass to a named beneficiary.

Revocable during life by any intent to revoke or if beneficiary predeceases settlor.

Majority rule: can be revoked by a will explicitly giving trust property to someone else.
UPC: no revocation by will.

Example: Totten trust arises when bank account is titled: “[depositor], in trust for [beneficiary]”.

Question 10

Oral Contract to Make a Will

Answer 10

Personal property: enforceable if contract can be established by clear and convincing evidence.

Real property: must be in writing to satisfy SOF.

Question 11

Spendthrift Trust

Answer 11

Enforceable clause saying beneficiary is unable (voluntarily or involuntarily) to transfer interest.

Causes creditors not to be able to reach income from trust except for necessities, the US government (like for taxes), and spousal/child support.

Unenforceable against settlor’s own creditors.

Question 12

Trustee’s Duties

Answer 12

Loyalty, invest prudently, preserve and protect trust property, impartiality, account and inform

Question 13

Trustee’s Duty of Loyalty

Answer 13

Duty against self-dealing. Trustee can’t buy/sell stocks to itself even for value, borrow against trust, transfer between trusts, or engage in any transaction in which trustee or close family member seeks to gain.

Question 14

Trustee’s Duty to Invest Prudently

Answer 14

Must invest in compliance with prudent investor rule. Duty not to commingle assets, duty to balance return with potential risks, duty to diversify investments (frequently tested), and duty to keep trust property productive (earn reasonable rate of return).

Question 15

Trustee’s Duty to Preserve and Protect Trust Property

Answer 15

Duty to insure assets

Question 16

Beneficiary’s Options After Breach

Answer 16

Remember: (“r,s,t”) ratify (& waive), surcharge (sue), or trace (& recover).

Ratify transaction and waive breach: (usually occurs when trustee puts “all eggs in one basket” and investment turns out to increase.

If transaction went poorly, beneficiaries can “surcharge” (sue) for resulting loss.

If breach includes self-dealing, beneficiaries can trace and recover property.

Question 17

Exculpation Clauses

Answer 17

Unenforceable if it: (1) relieves trustee of liability for bad-faith actions, or (2) was drafted by trustee, and settlor wasn’t represented by independent counsel.

Question 18

Expenditures

Answer 18

From income: ordinary expenses such as repairs, interest, and income taxes.

From principal: extraordinary items, capital improvements, income taxes on sale of property.

Question 19

Early Termination

Answer 19

Beneficiaries can terminate trust if all beneficiaries agree and there’s no further trust interest to be served.

Question 20

Cy Pres Doctrine

Answer 20

Applies when a specific charitable purpose indicated by the settlor no longer is possible, and settlor manifested a general charitable intent. The court can direct the trust property be applied to another charitable purpose as close as possible to the original one, rather than permit the trust to fail.