Trusts

Question 1

Define a trust

Answer 1

a trust is a fiduciary relationship with respect to property in which one person (the trustee) holds the legal title to the trust property (the res) subject to enforceable equitable rights in another (the beneficiary)
- it is a device whereby one or more persons manage the property for the benefit of others

Question 2

who are the main patties involved in the creation of a trust

Answer 2

Settlor - The settlor is the person who creates the trust

Trustee - The trustee is the person who holds the assets of the trust and its assets under the terms of the trust.

Beneficiary - The beneficiary is the person who is entitled too the assets of profits of the trust

Question 3

Express trust

Answer 3

An express trust is created when a person who has the intent to create a trust and complied with the requisite formalities to create that trust

Question 4

Implied trust

Answer 4

An implied trust is created by conduct regardless if whether there was intent to create a trust

Question 5

when is a valid express trust created?

Answer 5

(1) the settlor has intent to create the trust
(2) There is trust property
(3) An ascertainable beneficiary exists
(4) The trust has a trustee; AND
(5) The parties comply with the requisite formalities

Question 6

Precatory language

Answer 6

Precatory language merely expresses the settlor’s wishes regarding his property, not his intent ( such as “hope” or “request” )

Question 7

An ascertainable beneficiary

Answer 7

At the time of trust creation, the settlor must either;

(i) Specifically identify the beneficiary by name; OR
(ii) Sufficently describe how the beneficiary is to be identified

The beneficiary must able to possess title to the property (e.g an animal cannot be a trust beneficiary)
However the beneficiary need not have capacity to manage the property.

Question 8

requisite formalities

Answer 8

The creation of a trust involving real property must comply with the statue of frauds, while the creation of a trust involving personal property (without read property) need not comply with the Statue of Frauds

Question 9

Testamentary trusts

Answer 9

a testamentary trust is a trust that enters into existence upon the death of a person and disposes of their property. Such trusts must be executed with the same formalities as a will.

in order to create a testamentary trust:

(1) the will must state the essential trust terms (beneficiaries, purpose and trust property)
(2) intent to create a trust must be found from either (a) the express terms of the will or (b) incorporation by reference of a document/writing in existence at the time the will was created

Question 10

Revocable and irrevocable trusts

Answer 10

Under the common law (majority view), A trust is irrevocable UNLESS the settlor expressly retains the right to revoke or amend the trust

Under the Uniform trust code, a trust is revocable unless the trust expressly provides otherwise

Question 11

Pourover provisions

Answer 11

A pourover provision in a will devises property to a previously existing trust under the terms of the trust.
A prover provision does Not create a trust, it transfers property to a trust already in existence. Therefore, a pourer provision cannot devise property to a testamentary trust

Question 12

Discretionary trusts

Answer 12

A discretionary trust grants the trustee absolute power and discretion to make good faith determinations regarding when and how much of the trust property should be distributed to beneficiaries of the trust. Courts may interfere if the trustee is making such determinations in bad faith.

whether the trustee has abused their discretion depends on (1) the terms of the trust instrument; and (2) the other duties of the trustee.

Question 13

Support trusts

Answer 13

A support trust is a trust that contains a provision directing the trustee to pay to the beneficiary as much of the income or principal as is necessary for the beneficiary’s education and support.

Question 14

Pure support trusts

Answer 14

Pure support trusts limit the trustee’s discretion. The trustee is obligated to spend only so much of the available trust property as is necessary for the education and maintenance of the beneficiary.

Question 15

Spendthrift

Answer 15

Spendthrift trusts contain provisions designed to protect beneficiaries from their own carelessness. Generally, spendthrift provisions serve two main functions:

(1) The beneficiary is NOT permitted to sell or assign his beneficial interest; AND
(2) The beneficiary’s creditors CANNOT reach the beneficiary’s beneficial interest.

However, creditors are generally able to reach the beneficiary’s beneficial interests if:

(1) The settlor is the beneficiary of the spendthrift trust
(2) The creditor is seeking reimbursement for providing necessaries; OR
(3) The creditor has an order for child support or spousal support

Question 16

Alienability of Trust Interests

Answer 16

Trust interests are alienable, devisable and descendible unless the terms of the trust provide otherwise (e.g spendthrift clause that prevents transfer)

Question 17

Rights of creditors

Answer 17

• The creditors of the beneficiary of a trust have NO greater interest in the trust property than the rights of the beneficiary.
• If a trust prevents a beneficiary from receiving the trust principal, then the creditors have no right to reach the trust principal either.
• absent a spendthrift provision, the beneficiary’s creditors are able to reach the beneficiary’s interest by attachment to the interest income to the beneficiary. .
• creditors can reach the beneficiary’s interest once its distributed to the benefiary

Question 18

Deviation

Answer 18

Trustees and beneficiaries can request that the court permit a deviation from administrative provisions in the trust instrument. Generally a court will permit a deviation if the purposes of the trust:

(1) have been satisfied
(2) have become unlawful; OR
(3) are impossible to carry out.

Question 19

Cy pres Doctrine

Answer 19

if it becomes unlawful, impossible, or impracticable to carry out the purpose of a charitable trust, the Cy pres doctrine allows the court to modify the terms of the charitable trust “as near as possible” to the original intention of the settlor in order to prevent the trust from failing.

Question 20

when is the CY Pres doctrine applicable ?

Answer 20

The Cy pres doctrine is applicable only if:

(1) Property is placed in a trust for the charitable purpose that has become unlawful, impossible or impracticable to carry out;; AND
(2) The settlor manifested a general charitable intent to devote the property to charitable purposes

Question 21

Termination

Answer 21

Generally, a trust may be terminated if:

(1) The trust is revoked or expires pursuant to its terms
(2) The material purpose of the trust has been satisfied or becomes unlawful , contrary to public policy or impossible to carry out;
(3) The settlor and all the beneficiaries unanimously agree to terminate
(4) All the beneficiaries agree AND no material purposes for the trust remain
(5) termination will further the purpose of the trust due to circumstances that we’re not foreseen by the settlor; OR
(6) The court or trustee determines that the value of the trust property is too low to justify the cost of administration

Question 22

Exculpatory clauses

Answer 22

Under the majority view, the settlor may limit the potential liability of a trustee by including an exculpatory clause in the trust instrument. However, exculpatory clauses do not excuse the trustee for acts done in bad faith

Question 23

Uniform prudent investor (UPIA)

Answer 23

The UPIA requires the trustee to exercise the degree of care and skill as an investor of ordinary prudence would exercise in investing his own property

Question 24

Duty of care

Answer 24

The trustee owes a duty to exercise the degree of care and skill as a person of ordinary prudence would exercise in dealing with his own property. In making this determination, the focus is on the trustee’s conduct, not the results of such conduct

Question 25

Duty of loyalty

Answer 25

The trustee owes a duty of loyalty to the beneficiaries where the trustee may NOT obtain any personal gain from administering the trust, except for fees

Question 26

Self-dealing

Answer 26

Self-dealing is a per se breach of the duty of loyalty. Self- dealing includes any transaction involving the trust property that the trustee enters into for his own gain.

a. cannot buy assets from or sell assets to the trust
b. cannot borrow from trust or loan to trust
c. cannot personally gain through position
d. Corporate trustee cannot buy (but may retain) own stock

Question 27

Duty to act impartially

Answer 27

The trustee possesses a duty to be impartial with respect to ALL the beneficiaries of the trust when investing, managing, and distributing the trust property.

Impartiality means the trustee cannot be influenced by his personal favouritism or animosity toward individual beneficiaries when administering the trust.

Question 28

Income Allocations

Answer 28

The following newly acquired assets generally must be allocated to the trust income

(1) Receipt of rental payments from trust property; AND
(2) Corporate distributions

Question 29

Principal Allocations

Answer 29

The following newly acquired assets generally must be allocated to the trust principal.

(1) Funds received from the sale of trust property; AND
(2) Repayment of loan principal

Question 30

trust property

Answer 30

1. Property may be of any type, including future interests
2. Must be property that settlor has the power to convey
3. Must be described with certainty

Question 31

beneficiaries

Answer 31

1. must be capable of taking and holding title to property
2. must be definite (ascertainable within the period when all interests must vest under the Rule against Perpetuities)
3. Notice not required but beneficiary must accept; acceptance is presumed

Question 32

Valid trust purpose

Answer 32

Trust or provision must not be:

a. Illegal
b. Impossible to achieve
c. Contrary to public policy (e.g., induce crimes, torts, divorce, child neglect, etc.)
d. intended to defraud settlor’s creditors; or
e. based on illegal consideration

Question 33

charitable trust

Answer 33

1. purpose must benefit the public
2. must have indefinite beneficiaries
3. May be perpetual - Rule against Perpetuities does not apply

Question 34

constructive trust

Answer 34

Equitable Remedy to Prevent Unjust enrichment

1. Theft or Conversion
2. Fraud, duress, undue influence, mistake, or interference with contract relations
3. Breach of fiduciary duty
4. Breach of fraudulent promise, promise by one in confidential relationship, promise concerning will or inheritance, promise to forgo foreclosure bid

Question 35

trustee’s liability

Answer 35

if trustee commits breach of trust, court can:

a. Order specific performance of trustee’s duties
b. Issue injunction against trustee
c. compel trustee to pay money or restore property
d. suspend or remove trustee

trustee liable to beneficiaries for greater of:

a. Amount necessary to restore trust property and distributions to what they would have been absent breach, or
b. trustee’s profit from breach

trustee not liable for acts of co-trustees if did not join in action and exercised reasonable care in preventing breach or compelling co-trustee to redress breach

Question 36

trustee liability defences

Answer 36

a. trustee acted in reasonable reliance on trust terms

b. Beneficiary consented, released trustee of liability for breach committed.

Question 37

modification of trust by settlor

Answer 37

UTC: trusts presumed revocable and amendable unless terms expressly state otherwise.
Power to revoke includes power to modify

Question 38

modification of trust by beneficiaries

Answer 38

may terminate or modify if

a. settlor and all beneficiaries consent, even if it conflicts with a material purpose or
b. all beneficiaries consent, and no material purpose would be frustrated.
- representative can be appointed to represent interests of minor, unborn or ascertained beneficiaries.
- in most states spendthrift trust cannot be terminated without settlor’s consent

Question 39

Termination of trust by trustee

Answer 39

May terminate if trust property is less than 50,000 and is insufficient to justify administration costs

Question 40

modification of trust by court

Answer 40

1. May modify if trust could have been modified if all beneficiaries had consented and interests of non-consenting beneficiaries will be protected
2. May terminate or modify if circumstances unanticipated by settlor threaten trust purpose
3. May modify if continuation of trust is impractical or wasteful
4. May modify or terminate if value is insufficient to justify administration cost or achieve tax objective
5. May reform to reflect settlor’s intent if clear and convincing evidence shows settlor’s intent and trust were affected by mistake

Question 41

illusory trust

Answer 41

when a settlor retains significant control over the trust property indicating a lack of intent to create a trust (i.e when a settlor retains a right to withdrawal or names himself as sole trustee), the trust will be deemed illusory and invalid

Question 42

Resulting trust

Answer 42

if a trust fails for a lack of beneficiary, a Resulting Trust is implied by law, and all trust property returns to the settlor or settlor’s estate

Question 43

How trust assets pass?

Answer 43

Trust assets pass according to the terms of trust. When a testamentary trust or distribution fails, the trust property passes: (a) under the residuary clause in a will; OR (b) to a settlor’s heirs by intestacy

Question 44

Trustee duty to administer the trust

Answer 44

• The trustee must continue to administer the trust until the trust terminates, and must hold the trust assets until the remainder men are determined
• Under the common law, the trustee owed beneficiaries the duty to act with care, skill and prudence
• Under the Uniform trust code, a trustee must administer the trust (1) in good faith; (2) in accordance with the trust purpose and terms and (3) in the interests of the trust beneficiaries.

Question 45

no further inquiry rule

Answer 45

under the No Further Inquiry Rule, a transaction involving trust property entered into by the trustee for the trustee’s own benefit is automatically presumed to be a conflict of interest, and is voidable without further inquiry into the fairness of transaction or possible intent/motivation for self-dealing.

Question 46

Exceptions to the duty of loyalty - self dealing

Answer 46

(1) transaction was authorized by the terms of the trust
(2) if the transaction was approved by the court
(3) the beneficiary did not commence a judicial proceeding within the required time
(4) the beneficiary consented to the conduct, ratified te transaction or released the trustee of liability
(5) the transaction occurred before the person became a trustee

Question 47

Income allocation

Answer 47

(1) Receipt of rental payments from real or personal property
(2) Money received from an entity
(3) ordinary expenses and repairs

Question 48

Principal allocation

Answer 48

(1) Proceeds from the sale of a principal asset
(2) all other property received
(3) extraordinary expenses and repairs

Question 49

Remainder Beneficiary of a Trust

Answer 49

remainder beneficiaries are NOT entitled to receive trust property UNTIL the termination of the trust.

Question 50

Acceleration of Future interests

Answer 50

A person’s future remainder interest may be accelerated if the present holder

(a) loses his legal right to the property
(b) disclaims his present interest in the property

Question 51

Power of appointment

Answer 51

when a testator/settlor (donor) gives another person the power to decide where and whom the testator’s property will go, that person (the donee) has a power of appointment

• A general power of appointment is granted when the testator does not leave any conditions or restrictions as the appointment of the property.
• A testamentary power of appointment can only be exercised by the donee’s will and according to the donor’s conditions

Question 52

how is a power of appointment exercised?

Answer 52

The donee’s power is effectively exercised in an instrument only if

(1) the instrument is valid under state law
(2) The terms indicate the holder’s intent to exercise the power and are consistent with the conditions (if any) imposed by the testator and
(3) appointment is permissible

Question 53

Common law rule against Perpetuities

Answer 53

For an interest to be valid under the common law Rule against perpetuities (RAP), it must vest within a life in being at the time of the grant plus 21 years. This rule invalidates any interest that ill not vest during the time period AND those that hypothetically may not vest within the time period.

Question 54

Class gift

Answer 54

A class gift is a gift to a group of persons described collectively

• Under the common law, the words of a testator/settlor were given their legal meaning.
• However, modern courts are more likely to consider the testator/settlor’s intent.
• class gifts generally close at the death of the testator/settlor. Under the rule of convenience the class is closed when any member of the class is entitled to possession of the gift.

Question 55

Class gifts distribution

Answer 55

when a gift to a class is involved, whether the gift is to a predeceased member of a class will go into the residuary estate or be divided amongst the other class members depends on whether a group of persons is named or whether individual members of the class are specifically named.

• when the class is specifically named, the gift will lapse and fall into the residuary estate unless an anti-lapse statue applies.
• when the class members are need as a group, the predeceased member’s share will be divided amongst the other members, unless there is a provision in the will to the contrary or an anti-lapse statue applies.