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Trusts Flashcards

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1
Q

Definition of a trust

A

A trust is a fiduciary relationship in which one party (trustee) holds legal title to property for the benefit of designated beneficiaries

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2
Q

Who is a settlor?

A

person who created the trust (and has capacity to convey), giving trustee legal title to hold, manage, and administer trust property for beneficiaries

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3
Q

What are the main requirements for a trust?

A
  1. Grantor/settlor
  2. Intent to create a trust
  3. Trustee
  4. Ascertainable beneficiary
  5. Trust assets
  6. Valid trust purpose
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4
Q

Who is a trustee?

A

holds legal interest or title to the trust property; a court will appoint a trustee if the settlor fails to designate one or more

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5
Q

What are the types of trusts?

A

Express trusts and remedial trusts (remedial not typically tested)

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6
Q

What are the types of express trusts?

A

Private express trusts and charitable trusts

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7
Q

What are the types of private express trusts?

A

Inter vivos and testamentary

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8
Q

What are the types of inter vivos trusts?

A
  1. Pour-over
  2. Totten
  3. Life-insurance trust
  4. Living trust
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9
Q

What is a pour-over trust?

A

Private express, inter vivos - a provision in a will that directs the distribution of property to a trust upon the happening of an event, even if the trust instrument was not executed in accordance with the Statute of Wills, as long as the trust is identified in the will and its terms are set forth in a written instrument

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10
Q

What is a Totten trust?

A

Private express, inter vivos - 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

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11
Q

What is a life-insurance trust?

A

Private express, inter vivos - proceeds go to trust upon insured’s death; trust is owner of policy and trust is irrevocable

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12
Q

What is a living trust?

A

Private express, inter vivos - typically settlor names himself trustee until death; settlor can change successor trustee and beneficiaries until death; trust property not protected from creditors or federal estate taxation

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13
Q

What is a testamentary trust?

A

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

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14
Q

What are the types of testamentary trusts?

A

secret and semi-secret trusts

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15
Q

What is a secret trust?

A

Testamentary trust: trust—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)

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16
Q

What is a semi-secret trust?

A

Testamentary trust: 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)

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17
Q

What is the modern trend in implementing testamentary trusts?

A

impose a constructive trust in favor of the intended beneficiaries (if known) in both secret and semi-secret trusts

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18
Q

What are the requirements for a legal private express inter vivos trust?

A
  1. Delivery - must accompany the declaration of trust if a third-party trustee is named, whereby the settlor parts with dominion and control over the trust property
  2. Writing - required only for real property; a court will impose a constructive trust when a writing is lacking
  3. Parol evidence - evidence outside of the written agreement is permitted to show the settlor’s intent only if the written agreement is ambiguous on its face
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19
Q

What is the intent requirement for private express trusts?

A

present intent to transfer to trustee who has duties to perform for the benefit of one or more ascertainable beneficiaries for a valid purpose; manifestation of intent must occur prior to or simultaneously with the transfer of property (use of common trust terms will create a presumption of intent); no consideration required

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20
Q

What is a precatory trust?

A

(expresses a hope or wish that the property transferred be used for the benefit of another rather than creating a legal obligation)—must contain specific instructions to a fiduciary, and must be shown that absent 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

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21
Q

What are the requirements for trust property?

A

Trust property must be identifiable and segregated, and it must be described with reasonable certainty

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22
Q

What happens if trust property is invalid for lack of assets?

A

if a trust that is invalid for lack of assets is later funded, a trust arises if the settlor re-manifests the intent to create a trust

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23
Q

What is a valid trust purpose? What is not?

A

ANY PURPOSE as long as for benefit of beneficiaries. Exceptions:

  1. Illegality
  2. Contrary to public policy
  3. Possible to achieve
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24
Q

What happens if a trust term violates public policy?

A

alternative terms will be honored, or, if none, the term will be stricken; but the trust will not fail unless removal of the term is fatal

25
Q

What is the rule for ascertainable beneficiaries?

A

beneficiaries must be identifiable by name so that the equitable interest can be transferred automatically by operation of law and directly benefit the person; the
settlor may refer to acts of independent significance to identify the beneficiaries; can also sufficiently describe how beneficiaries will be ascertained

26
Q

What are exceptions to the ascertainable beneficiaries requirement?

A
  1. trusts for the benefit of unborn children
  2. trusts to a reasonably definite class
  3. Charitable trusts (do not need individual ascertainable beneficiaries)
27
Q

What are some examples of charitable trust purposes?

A
  1. relief of poverty
  2. advancement of education or religion
  3. good health
  4. governmental purposes, and
  5. other purposes benefiting the community at large
28
Q

Who are beneficiaries to a charitable trust?

A

Indefinite and unascertainable: The beneficiaries must be the community at large (directly or indirectly) - reasonably large class

  • a trust benefitting a single charitable organization whose activities meet requirements is acceptable
29
Q

What is the cy pres doctrine?

A

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

30
Q

What is a charitable trust?

A

Type of private express trust that has the purpose of benefitting an unascertained group of people or the public at large.

*not subj to RAP

31
Q

What is the test for whether beneficiaries to a charitable trust are indefinite and unascertainable?

A

beneficiaries are indefinite and unascertainable if they are unnamed and changing over time

32
Q

How do we determine a charitable trust’s purpose?

A

Look to effect of the trust, not motive of the settlor

33
Q

What makes a valid inter vivos trust?

A

Creation requires either:

  • Transfer of property — property owner transfers property to another as trustee, or
  • Declaration of trust — property owner declares himself trustee for another

Delivery — if property owner declares another as trustee (i.e., settlor is not trustee), property must be delivered to trustee

Formalities — writing not required, but an oral trust and its terms can only be established by clear and convincing evidence

Land as property — writing required under Statute of Frauds

34
Q

Trustee duties

A

PEARLS

P- Preserve property/productive (diversify)

E -enforce/defend trust

A-administer: good faith and prudent (reasonable care) w/i trust terms (can only delegate small decisions)

R-report/account: keep benny’s informed/disclose

L-loyalty: no self-dealing (per se breach) unless court approved

S- separate property/keep account/impartial

35
Q

What is the beneficiary’s right to alienation?

A

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

36
Q

What is a support trust and what are creditor’s rights to the funds?

A
  • directs the trustee to pay income or principal as necessary to support the trust beneficiary and maintain lifestyle
  • creditors cannot reach these assets unless providing a necessity to the beneficiary (trustee can pay directly)
37
Q

What is a discretionary trust and what are creditor’s rights to the funds?

A
  • the trustee is given complete discretion regarding whether or not to apply payments of income or principal to the beneficiary
  • creditors have the same rights as a
    beneficiary if the trustee exercises discretion to pay
38
Q

What is mandatory trust?

A

the trustee has no discretion; the trust document explains in detail how and when trust property is to be distributed

39
Q

What is a spendthrift trust and what are creditor’s rights to the funds?

A
  • expressly restricts the beneficiary’s power to voluntarily or involuntarily transfer his equitable interest;
  • creditors usually cannot reach the trust interest if the governing instrument contains a spendthrift clause (unless for child or spousal support, tax lien holders, and sometimes basic necessities providers.)
40
Q

What are the majority and minority views on revocability of a trust?

A
  • Majority/UTC rule—a trust is presumed to be revocable unless it expressly states otherwise
  • Minority rule—a trust is presumed to be irrevocable unless it expressly states otherwise
41
Q

When will a trust terminate automatically?

A
  1. when the trust purpose has been accomplished;
  2. by consent if the settlor is deceased or has no
    remaining interest, and all beneficiaries and the trustee consent; or
  3. by a court if the purpose has been achieved or becomes illegal, impracticable, or impossible
42
Q

What is the Clafin doctrine?

A

under Claflin doctrine, a trustee can block a premature trust termination if the trust is shown to have an unfulfilled material purpose (e.g., discretionary trusts, support trusts, spendthrift trusts, and age-dependent trusts)

43
Q

How can a trust be revoked?

A

settlor may amend or revoke according to trust terms, or if silent, by manifesting clear & convincing evidence of intent (e.g., will/codicil)

44
Q

What is the doctrine of equitable deviation?

A

court may modify terms of a trust without seeking
beneficiary consent
(i) due to unanticipated circumstances if the changes would further the purposes of the trust; or
(ii) the terms relate to management of trust property and existing terms would be impracticable or wasteful or impair the trust’s administration

45
Q

When can termination or modification take place?

A

the settlor must expressly reserve the right to modify or terminate a trust in order to be granted such powers; otherwise modification or termination can occur only with the consent of all beneficiaries and if the proposed change will not interfere with a primary purpose of the trust

46
Q

Does the trustee have a power to terminate?

A

trustee has no power to terminate acting alone, unless the trust contains express termination provisions

47
Q

What are the life trust holder and the remainderman entitled to from the trust?

A

life beneficiaries entitle to trust income and remaindermen entitled to trust principal

48
Q

How must the principal/income be allocated?

A

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
49
Q

How are receipts allocated?

A

generally amount received in exchange for trust property is allocated to principal; amount received for use of trust property is income

50
Q

How are expenses allocated?

A

one-half of the trustee’s compensation and one-half of accounting and other costs is charged to income; the remaining one-half of those expenses is charged to
principal

51
Q

What is the trustee’s duty of care?

A

the trustee has the powers necessary to act as a reasonably prudent person in managing the trust (e.g., revoke, withdraw, or modify), including the implied power to contract, sell, lease, or transfer the trust property

52
Q

What is the legal standard when there is evidence of a trustee’s self-dealing?

A

Irrebuttable presumption—that the trustee breached the duty of loyalty when self-dealing is an issue; no further inquiry into the trustee’s reasonableness or good faith is
required because self-dealing is a per se breach

53
Q

How are conflicts of interest handled?

A

assessed under the “reasonable and in good faith” standard if an alleged conflict of interest cannot be characterized as self-dealing

54
Q

What is the prudent investor rule?

A

requires the trustee to act as a prudent investor would act when investing his own property (putting less emphasis on risk level); the trustee must exercise reasonable care, caution, and skill when investing and managing trust assets

55
Q

What are factors in determining compliance with the prudent investor rule?

A

o Trust’s distribution requirements
o General economic conditions
o Investment in relation to the trust’s overall investment portfolio
o Trust’s need for liquidity, income regularity, and preservation or appreciation of capital

56
Q

When may beneficiaries bring an action against a trustee?

A

lost profits, interests, and other losses resulting from
a breach of trust are the trustee’s responsibility; beneficiaries may sue the trustee and seek damages or removal of the trustee for breach

57
Q

When is a trustee liable for another’s acts?

A
  • co-trustees are jointly liable;
  • the trustee is liable for a predecessor’s breach if he failed to address it or was negligent in delivering property;
  • generally, the trustee is liable for an agent’s breach if the trustee directs or conceals the agent’s act or fails to exercise reasonable supervision over the agent
58
Q

What is the rule on future interests for class gifts?

A

the share of a deceased class member is paid to that class member’s surviving issue; by statute, the modern trend is that a substitute gift is created in the descendants of the deceased issue so that a predeceased beneficiary’s interest in a trust will not lapse

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