Trusts

Question 1

What is a trust?

Answer 1

• A trust is a fiduciary relationship
• where one or more trustees are called upon
• to manage, protect, and invest certain property
• and any income generated
• for the benefit of one or more named beneficiaries

Question 2

A trust is valid so long as it has what?

Answer 2

• a trustee
• an ascertainable beneficiary
• assets

Question 3

Unless terms provide otherwise, trust interests are what?

Answer 3

• alienable
• devisable
• descendible

Question 4

3 main types of trusts

Answer 4

• express
• resulting
• constructive

Question 5

5 trust requirements

Answer 5

1. grantor/settlor
2. intent
3. trustee
4. ascertainable beneficiary
5. trust assets

Question 6

private express trust

Answer 6

clearly states the intention of the settlor to transfer property to trustee for the benefit of one or more ascertainable beneficiaries

Question 7

what is a precatory trust?

Answer 7

expresses hope or wish that the property transferred be used for the benefit of another rather than creating a legal obligation

To be valid it must:

• contain specific instructions to a fiduciary
• must be shown that without imposition of a trust, there would be an unnatural disposition of the donor’s property because of familial relations or history of support between donor and intended beneficiary

Question 8

Trust Property

Answer 8

• must be identifiable and segregated and it must be described with reasonable certainty
• A trust must be funded with identifiable property, but if a trust that is invalid for a lack of assets is later funded, a trust arises if the settlor re-manifests the intent to create a trust

Question 9

Valid trust purpose

Answer 9

A trust can be created for any purpose so long as it is not illegal or contrary to public policy and is possible to achieve; and is for the benefit of its beneficiaries

Question 10

Inter vivos trust

Answer 10

Delivery - must accompany the declaration of trust if a third-party trustee is named, where the settlor parts with dominion and control over the trust property

Writing - required ONLY FOR REAL PROPERTY; a court will impose a constructive trust when writing is lacking

Parol evidence - allowed to show settlor’s intent if writing is ambiguous on its face

Question 11

Pour over trust

Answer 11

provision in a will that directs the distribution of property to a trust upon the happening of an event

Question 12

Totten trust

Answer 12

a designation given to a bank account in a depositor’s name as trustee for a named beneficiary (no separation of legal and equitable title)

• can be revoked by any lifetime act manifesting the depositor’s intent to revoke, or by will

Question 13

Life-insurance trust

Answer 13

proceeds go to trust upon insured’s death; trust is owner of policy and trust is irrevocable

Question 14

Living trust

Answer 14

• typically settlor names himself the trustee until death;
• settlor can change successor trustee and beneficiaries until death;
• trust property not protected from creditors or federal estate taxation

Question 15

testamentary trust

Answer 15

occurs when the terms of a trust are contained in writing in a will or in a document incorporated by reference into a will

Question 16

“secret” trust

Answer 16

looks like a testamentary gift, but is created in reliance on the named beneficiary’s promise to hold and administer the property for another (a constructive trust is imposed on the property for the intended beneficiary)

Question 17

“semi-secret” trust

Answer 17

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 ( a resulting trust is imposed on the property to be held for the testator’s heirs)

Question 18

cy pres doctrine

Answer 18

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

Question 19

revocability of trusts?

Answer 19

Majority rule - trust is presumed irrevocable

Uniform Trust Code - trust is presumed revocable

Question 20

mandatory trust

Answer 20

trustee must make distributions from the trust

Question 21

discretionary trust

Answer 21

trustee may make distributions in her discretion

Question 22

remedial trust

Answer 22

a legal remedy created by operation of law

Question 23

resulting trust

Answer 23

used when a trust fails

- trustee must return property to settlor or settlor’s estate

Question 24

purchase-money resulting trust

Answer 24

person one buys the property but title is taken in person two’s name

Question 25

constructive trust

Answer 25

a remedy used to prevent unjust enrichment if a 3rd party takes advantage of the settlor

Look for:

• fraud
• duress
• undue influence
• breach of a duty
• detrimental reliance by a third party

Question 26

alienation?

Answer 26

a beneficiary’s equitable interest in trust property is freely alienable unless a statute or trust instrument limits this right

Question 27

Claflin Doctrine

Answer 27

a trustee can block a premature trust termination if the trust is shown to have an unfulfilled material purpose

Question 28

trust termination

Answer 28

automatically - when trust purpose has been accomplished

by consent -

• if settlor is deceased or has no remaining interest and all beneficiaries and the trustee consent,
• or by a court if the purpose has been achieved or becomes illegal, impracticable, or impossible for any reason

Question 29

principal and income allocation

Answer 29

allocation must be balanced so as to treat present and future trust beneficiaries fairly unless otherwise authorized

• UPAIA = trustee can re-categorize and reallocate as necessary to fulfill trust purpose
• stock distribution = treated as the distribution of principal whether classified as a dividend or a split

Question 30

trustee’s powers

Answer 30

power to act as a reasonably prudent person in managing the trust, including implied power to contract, sell, lease, or transfer trust property

Question 31

trustee’s duties

Answer 31

Loyalty (objective) & Good Faith (subjective)

Question 32

duty of prudence

Answer 32

trustee may delegate responsibilities if it would be unreasonable for the settlor to require the trustee to perform such tasks; however, a critical function concerning the property is discretionary and not delegable

Question 33

trustee’s liabilities

Answer 33

• liable for lost profits, interests, and other losses resulting from a breach of trust
• liable for a predecessor trustee’s acts if he failed to address it or was negligent in delivering property
• personally liable on contracts entered into and for tortious acts committed while acting as trustee