Trusts

Question 1

Valid Trust

&

Express Trust Elements

Answer 1

A trust is valid if it has a trustee, a beneficiary, and trust property.

To create a valid express trust, there must be:

1. settlor (with capacity to convey) who,
2. has clear and present intent to create a trust
3. for a valid trust propose and
4. who delivers the trust property to the trustee
5. to hold for the benefit of one or more beneficiaries.
   
   1. express private trust - defined and ascertainable persons either inter vivos or testamentary (by will) - most common
   2. express charitable trust - created for benefit of an indefinite class of people or public generally

Question 2

Termination of the Trust

Answer 2

Under the Uniform Trust Code, trust can terminate by either:

1. Settlor may terminate the trust if all beneficiaries are in existence and all agree to the termination.
2. Beneficiaries can terminate after settlor dies (even an irrevocable trust) if:
   
   1. both income beneficiaries and remaindermaen unanimously consent
   2. and there is no material purpose of the trust yet to be performed.

Question 3

Revocability of Trusts

Answer 3

1. Common Law - Majority View
   
   • A trust is irrevocable unless the settlor expressly retains the right to revoke or amend the trust
2. Uniform Trust Code - Minority View
   
   • A trust is revocable unless the trust expressly state that it is irrevocable

Note: The power to revoke also includes the power to amend

Question 4

Trustee’s Duty of Loyalty

Answer 4

1. Loyalty: to act in the best interest of the beneficiaries
2. Trustee cannot engage in self-dealing (i.e. any transaction with the trust property that the trustee enters into for his own gain).
3. Express Waiver - Settlor may expressly waive trustee’s duty of loyalty but this will not waive any acts done in bad faith

• Remedy for Breach in Self-Dealing Case: The trsut beneficiaries may rescind transaction and ask for the self-dealing purchase to be set aside or recover any profits from the trustee made by reason of breach

Question 5

Trustee’s Duty of Care

Answer 5

1. Administer - in good faith and in a prudent manner in accordance with the terms and beneficiary interests
2. Prudent Investor Rule: UPIA (Uniform Prudent Investor Act) requires trustee to exercise the degree of care and skill as an investor of ordinary prudence would exercise in investing his own property.
3. Also includes:
   
   1. Duty to Diversify
   2. Report: keep beneficiaries reasonably informed of the trust and its administration
   3. Seperate Trust and property
   4. Enforce Claims and Defend Trust
   5. Preserve Property and make it Profitable

• Remedy for Breach of Trust:*
• Suspending or removing a trustee, decreasing compensation, compelling a trsutee to perform trust duties, compelling payent of damages, asking court to order any other “appropriate relief”.

Question 6

Testamentary Trust

Answer 6

Created through provisions of the settlor’s will and does not come into existence until the settlor dies (must meet the same formalities as the will).

Question 7

Pour over gift

Answer 7

• Traditional View: to create a valid pour-over gift frm a will to a revocable trust, the trust must be in existence or must be executed at the time of the will’s execution.
• Modern, Prevailing View: A will may devise property to a trustee of a trsut established or to be established during the testator’s life. (i.e. the trust may be established after the will is executed but before the testator’s death).

Question 8

Discretionary Trust

Answer 8

1. Discretionary Trust: gives trustee absolute power and discretion to make decisions regarding distribution of trust property to beneficiaries.
   
   1. Beneficiary have no right to income
   2. Beneficiary’s creditors cannot reach trust b/e beneficiary cannot compel payment from trust (unless trustee is served with process)
2. Courts may intervene if the trustee is acting in bad faith

Question 9

Support Trust

Answer 9

• Directs trustee to pay beneficiaries from trust as much as is necessary for beneficiary’s support (can be pure or discretionary)
  
  1. Pure support trusts limit the trustee’s discretion to spend only what is necessary for support/maintence of beneficiary
  2. Discretionary - gives trustee more discretion

Question 10

Spendthrift Trusts

Answer 10

Created to protect beneficiaries from their own carelessness.

Serves 2 main functions:

1. The beneficiay is not permitted to sell or asign his beneficial interest; and
2. The beneficiary’s creditors cannot reach the beneficiary’s beneficial interest unless
   
   1. Settlor is the beneficiary (i.e. self-settled trust),
   2. Creditor is seeking reimbursement for providing necessaries; or
   3. Creditor has an order for child support or alimony

Question 11

Charitable Trust

Answer 11

Has the purpose of benefiting an unascertained group of people or the public at large

Distinguishing Characteristics:

1. Indefinite beneficiaries - (single organization permitted) - Test:
   
   1. beneficiaires are indefinite and unascertainable if they are unnamed and ching over time
2. Charitable Purpose - must be considered to benefit the public
   
   1. Effect of gift, not motive of settlor controls (building a pool next to house for whole neighborhood)
   2. Cannot be a trust in fabor of a political party but can be to support a political intitative
3. Can be perpetual - RAP does not apply
4. Cy Pres Doctrine: trust’s property can be applied to different charitable purposes

Question 12

Honorary Trust

Answer 12

A trust that does not have a charitable purpose or a definite beneficiary. It is often a trust to take care of a thing (cemetary plot) for a noncharitable purpose.

1. UTC: Valid but may not be enforced for more than 21 years
2. Common Law: An honorary trust is not valid if it violates the rule against perpetuitites, but a court may charaterizethe trust as a “power” and allow the trustee to exervise that power in accordance with the trust terms for 21 years.

Question 13

Judicial Modification of Trust

Answer 13

1. Through Deviation: Trustees and beneficiarys can request that court permit a deviation from administration provisions. The court will generally permit deviation if the purposes of the trust:
   
   • Unaticipated Changed Cirucmstances
     
     • Are impossible to carry out
     • Have become unlawful or
     • Have been satisfied,
2. Cy Pres Doctrine: The court can modify the terms of a charitable trust “as near as possible” to the original intent of the settlor in order to prevent the trust from failing if:
   
   • Property is placed in trust for a charitable purpose and
   • Purpose has become unlawful, impossible, or impractiable to carry out the purpose of a charitable trust, and
   • Settlor manifested general intent to devote property to charitable purposes (will presume)
     
     • Note: Absense of a reverter clause is evidence of general charitable intent

Question 14

Powers of Appointment

Answer 14

A power of appointment is usually oconveyed by will or trust from the donor (decedent) to donee (trustee) grainting the donee the right to appoint or distribute property left by the donor.

• Majority View: PoA can be exercised in a general residuary clause of a will only if: it is a general power or will manifests testator’s intention to include property subject to power.

Can be

1. Special: Donor leaves restrictions as to the appointment of property (donee may not exercise a special appointment for his own benefit)
2. General: occurs when donor leaves no restrictions; donee is free to appoint property to himself, creditors, and orders