Trusts

Question 1

Create a Valid Trust

(Requirements)

Answer 1

A valid trust arises when the settlor, with the intent to create a trust for a legal purpose, delivers title of the res to the trustee to hold for the benefit of the beneficiaries.

Question 2

Res

(Requirements)

Answer 2

The res is the trust property. The res must be certain and identifiable.

Question 3

What happens if a settlor promises to create a trust before the res exists?

Answer 3

If a settlor promises to create a trust before the res exists and the promise is gratuitous, a trust will arise only if the settlor remanifests their intent to create the trust when the res comes into existence. They may remanifest their intent either expressly or impliedly.

If the settor’s promise is supported by consideration, then it may be enforced on contract principles.

Question 4

What happens if the settor creates an empty trust?

Answer 4

An otherwise empty trust is valid if the settlor names the trust as a beneficiary of:

1. A life insurance policy;
2. A pension plan death benefit;
3. Their will.

Question 5

What happens if the settlor fails to name a trustee or the named trustee dies?

Answer 5

If the settlor fails to name a trustee or the named trustee dies, then the court will appoint a trustee.

⇒ Exception: Powers personal to the named trustee.

Question 6

Powers Personal to the Named Trustee

Answer 6

If the court finds that the settlor intended that the trust powers be personal to the named trustee, and the named trustee is unable to serve as trustee, then the trust will terminate.

⇒ This is very rare! The court will generally find that the settlor intended that the trust continue for its indicated purpose.

Question 7

Beneficiaries

(Basic Requirements)

Answer 7

Beneficiaries must be ascertainable.

Question 8

Class Beneficiaries

(Requirements)

Answer 8

The members of a class of beneficiaries must be ascertainable.

⇒ A settlor cannot give a trustee discretion to name beneficiaries, although a settlor may give a trustee discretion to determine the shares that each beneficiary is entitled to.

Question 9

What happens if a settlor fails to name an ascertainable class of beneficiaries?

Answer 9

Under the traditional rule, the trust would fail. However, under the modern rule, the trust will be allowed to continue as a power of appointment.

Question 10

Honorary Trust

Answer 10

An honorary trust is a trust that is not for the benefit of a living person. It may be for the benefit of animals or graves. At common law, honorary trusts violate the Rule Against Perpetuities. Under the UTC:

1. Honorary trusts are valid (e.g., for the life of the animal);
2. The court will appoint someone to enforce the trust;
3. If the purpose of the trust is fulfilled, the remaining trust corpus will be returned to the estate by resulting trust.

Question 11

Is a recovable trust valid?

Answer 11

Yes, even if the settlor:

• Retains the right to revoke, alter, or amend the trust;
• Keeps an income interest in the trust;
• Retains a power of apointment over the trust corpus;
• Retains everyday control over the trust, such as by naming herself trustee.

Question 12

Pour-Over Clause

(Requirements)

Answer 12

A pour-over clause is a clause in a will that leaves property to a revocable trust. It is valid if:

1. The trust instrument is written;
2. The will identifies the trust.

Question 13

What happens if the settlor alters the terms of a trust that is named as the beneficiary of a pour-over clause?

Answer 13

Nothing. The pour-over clause succeeds even though the trust was amended without testamentary formalities.

Question 14

When must the settlor create that trust that is the beneficiary of a pour-over clause?

Answer 14

The settlor may create the trust that is the beneficiary of a pour-over before, concurrently with, or after, the will is executed.

Question 15

May the settlor name herself as both trustee and beneficiary of a revocable trust?

Answer 15

Yes, as long as the settlor is not both the sole trustee and sole beneficiary of the trust.

Question 16

Totten Trust

Answer 16

A totten trust is a bank account that functions as a trust.

Question 17

How may a Totten trust be revoked, and what happens if it is?

Answer 17

At Totten trust may be revoked by any manifestation intended to revoke the trust or by the depositor’s will.

If a Totten trust is revoked, it functions as a normal bank account.

Question 18

Are oral inter vivos trusts valid?

Answer 18

Yes, oral inter vivos trusts are valid, UNLESS the Statute of Frauds applies, such as to trusts taht create an interest in land.

Question 19

Is an oral contract to devise property by will enforceable?

Answer 19

Yes, if:

1. The contract is supported by consideration;
2. The contract can be established clear and convincing evidence;
3. The Statute of Frauds doesn’t apply to the contract.

Question 20

Secret Trust

Answer 20

A secret trust is a testamentary trust that combines an absolute devise by the settlor’s will with trustee’s oral promise to hold the property.

Question 21

What happens if a secret trust’s trustee claims that there is no trust?

Answer 21

If a secret trust’s trustee claims that there is no trust, extrinsic evidence may be used to demonstrate by clear, convincing, and satisfactory evidence that a trust exists.

Question 22

What happens if a trustee of a secret trust was never told about the trust?

Answer 22

If the trustee of a secret trust was never told about the trust, then the trust takes the property free of any trust obligations.

Question 23

Semi-Secret Trust

Answer 23

A semi-secret trust is a testamentary trust that combines an absolute devise in trust with an oral agreement as to beneficiaries.

The trustee cannot comply with the trust. The trustee instead takes the property in resulting trust for the testator’s heirs.

Question 24

Charitable Trusts

The Four Rules

Answer 24

Charitable trusts . . .

1. Are not subject to the Rule Against Perpetuities;
2. Must be for a charitable purpose;
3. Must benefit a reasonably large and unidentifiable segment of the public;
4. Can be reformed by the doctrine of cy pres.

Question 25

Doctrine of Cy Pres

Answer 25

Under the doctrine of cy pres, if the specific purpose of a charitable trust can no longer be accomplished, the court may reform the trust to serve a new charitable use that conforms as closely as possible with the settlor’s original intent.

A court will not apply cy pres if the settlor’s intent was limited to the original charitable purpose of the trust. (Court’s rarely decline to apply cy pres.)

Question 26

What is the private trust companion to the doctrine of cypres?

Answer 26

Deviation from trust administrative terms because of changed circumstances.

Question 27

May a trustee alienate or assign her income interest in a trust?

Answer 27

Yes.

Question 28

Spendthrift Trust

Answer 28

A spendthrift trust is a trust whose interest a beneficiary cannot voluntarily or involuntarily transfer. Spendthrift trusts are valid only if they prohibit both voluntary and involuntary transfer.

Question 29

When may a third party obtain a right to a beneficiary’s interest in a spendthrift trust?

Answer 29

When:

1. The third party has a claim for necessities;
2. To secure alimony or child support;
3. When the claimant is the U.S. or a state.

Question 30

What special rules apply to trusts that benefit the settlor?

Answer 30

1. Spendthrift clauses are unenforceable;
2. If the trust is revocable, then creditors may access the trust corpus;
3. If the trustee has discretion to make distributions to the settlor, then creditors may access the trust corpus.

Question 31

May a beneficiary sue a trustee to make distributions from a discretionary trust?

Answer 31

Generally, a trustee cannot force distributions. However, a court may order a trustee to distribute in order to satisfy claims by the beneficiary’s child, spouse, or former spouse. (Read: alimony and child support.)

Question 32

Trustee’s Fiduciary Duties

Answer 32

1. Duty of Loyalty
2. Duty to Invest Prudently
3. Duty of Impartiality
4. Duty to Preserve and Protect the Trust Property
5. Duty to Account and Inform

Question 33

Duty to Invest Prudently

Answer 33

Under the duty to invest prudently, a trustee is required to manage the trust property as a prudent investor would, taking into account the trust’s purpose and terms. In so doing, the must exercise reasonable care, skill, and caution.

1. Duty not to commingle assets;
2. Duty to balance risk and return;
3. Duty to diversify;
4. Duty to keep the trust property productive.

Whether a trustee satisfies their duty to invest prudently is judged from a whole portfolio view.

Question 34

If multiple trustees administer a trust, how do they make decisions?

Answer 34

By majority vote.

Question 35

What actions may a beneficiary take if a trustee breaches their fiduciary duties?

Answer 35

The beneficiary may:

1. Ratify the transaction;
2. Surcharge the trustee for the loss;
3. Trace and recover lost property for the trust.

Question 36

Is one trustee liable for another trustee’s breach?

Answer 36

No, unless the trustee is also responsible for the breach or for failing to correct it.

Question 37

Who does the trustee of a revocable trust owe fiduciary duties to?

Answer 37

The trustee of a revocable trust owes fiduciary duties only to the settlor. They don’t owe fiduciary duties to other beneficiaries.

Question 38

Claflin Doctrine

Answer 38

Under the Claflin doctrine, a trust can be terminated by the beneficiaries if:

1. All of the beneficiaries consent;
2. There is no further trust purpose to be served.

⇒ If any of the beneficiaries are minors or unborn, then the Claflin doctrine cannot be used to terminate a trust.

Question 39

How does the Claflin doctrine interact with spendthrift trusts?

Answer 39

A spendthrift trust cannot be revoked under the Claflin doctrine UNLESS the settlor consents. This is because the trust’s spendthrift clause manifests the settlor’s intent that the beneficiaries be unable to volunarily or involuntarily assign their interest in the trust.

Question 40

Resulting Trust

Answer 40

A resulting trust is implied when:

1. An express trust fails;
2. An express trust’s purpose is accomplished and the trust corpus is not exhaused.

The trust corpus reverts to the settlor’s estate.

Question 41

Purchase Money Resulting Trust

Answer 41

A purchase money resulting trust is presumed to arise when consideration is paid for property by one person, but title in that property is taken by another person.

Question 42

Constructive Trust

Answer 42

A constructive trust is implied if a person obtains title to property wrongfully. The trust is implied in order to remedy unjust enrichment.

Question 43

Power of Appointment

Answer 43

If a donor creates a power of appointment, the power of appointment entitles the donee to designate the person who will recieve the property that the power applies to.

• A power of appointment is general if the donee may appoint herself, her estate, or the creditors of either to recieve the property.
• A power of appointment is specific if the donee may not appoint herself, her estate, or the creditors of either.