Trusts

Question 1

Types of Trusts

Answer 1

1. private trusts
2. charitable trusts
3. constructive trusts
4. resulting trusts
5. honorary trusts
6. Totten trusts
7. spendthrift trusts

Question 2

Creation of a Valid Trust

Answer 2

1. property
2. beneficiary
3. trustee
4. intent
5. creation
6. valid trust purpose

Question 3

Delivery of Trust Assets

Answer 3

for inter vivos trust with third-party trustee, must deliver subject matter of trust

does not apply to testamentary trusts or self-declaration trusts (i.e., “I declare myself Trustee”

Question 4

Intent

Answer 4

requires intent to impose a duty

must be present manifestation

permissive language is not sufficient

• invalid = “it is my wish and my desire that he looks after X”
• valid = “it is my wish and my desire that he use the income to support X until the age of 18, then distribute to X outright”

Question 5

Trust Purpose

Answer 5

can be created for any purpose except:

1. illegal
2. contrary to public policy
3. impossible to achieve

Question 6

Trust Assets (Res)

Answer 6

must have specific interest in the property

the property must be certain and identifiable, otherwise there’s no trust

Question 7

Debt as Property

Answer 7

debt that someone owes you can be property for your trust

debt that you owe someone else cannot be property for your trust

Question 8

Expectancy as Property

Answer 8

must have a recognized property interest, not just an expectancy

if you only have an expectancy, any attempted trust is only a gratuitous promise to create the trust in the future

• ​once the expectancy ripens into an interest, you must reaffirm your intent by words or conduct
• conduct:
  
  • distribution of income to beneficiary OR
  • keeping records like a trustee would

different result if promise is supported by consideration

• trust automatically attaches when property is received
• no need to reaffirm

Question 9

Trustee Requirement

Answer 9

a trust will not fail for lack of a trustee

the court will appoint a trustee

except when powers are personal to the named trustee

Question 10

Will Beneficiary’s Property Interest

Answer 10

if the will testator has died, the legatee has more than an expectancy

right to receive under the will is certain and identifiable

it can be used as the res when the testator has died, even if the estate has not yet been distributed

Question 11

Life Insurance and Death Proceeds as Property

Answer 11

most states have statutes that allow an otherwise empty trust to be valid if it is named as the direct beneficiary of a life insurance policy or a pension plan death benefit

some states also allow if trust is a direct beneficiary of a settlor’s will

Question 12

Ascertainable Beneficiaries

Answer 12

ascertainable class of beneficiaries is required in a private trust–not in a charitable trust

if a class is defined, % shares can be left to the discretion of the trustee

“friends” is not an ascertainable class

• traditional rule = cannot give effect as a valid power of appointment
• majority rule = can argue this is a valid power of appointment

do not have to be living beneficiaries

Question 13

Living Beneficiaries

Question 14

Resulting Trust

Answer 14

arises when:

• all or part of a trust fails or
• trust provided more than what was needed for trust purpose or
• semi-secret trust cases

property returns to the settlor (or settlor’s estate) to be held in trust

purchase-money resulting trust: presumed to arise when consideration for purchase of property is paid by person other than the one taking title

• defenses = gift or loan
• gift is presumed (not a trust) when person providing consideration bears a close family relationship to the holder

Question 15

Honorary Trust

Answer 15

common law = trust violates RAP and is void

UTC = trust is valid for the life of the animals

• court designates someone to have standing to enforce the trust
• leftover money returns to settlor’s estate in a resulting trust

Question 16

Revocable Trust

Answer 16

valid by statutes in some states and by case law in almost every other

T can be both trustee and beneficiary, so long as he is not the sole trustee and sole beneficiary

Question 17

Totten Trust

Answer 17

revocable during life by any manifestation of intent to revoke, including withdrawals

• majority = revocable by depositer’s will
• UPC = no revocation by will

reachable by depositor’s creditors during life and after death to the extent depositor’s probate assets are insufficient to pay his creditors

Question 18

Charitable Trust

Answer 18

1. can last and accumulate income perpetually (no RAP or RAA)
2. must be for a charitable purpose

• religion, medicine, science, government, research, education
• requires a mechanism for policing the charitable objective

3. must be in favor of a reasonably large number of unidentifiable beneficiaries
4. when charitable purpose can no longer be accomplished, may be reformed under cy pres

Question 19

Cy Pres Doctrine

Answer 19

court may use to reform a charitable trust whose purpose can no longer be accomplished by looking at:

1. primary intent of the settlor
   * UTC = settlor’s general charitable intent is conclusively presumed and unless the trust says otherwise, court must reform the trust
2. specific direction from the instrument itself

Question 20

Spendthrift Trust

Answer 20

beneficiary is unable to voluntarily or involuntarily transfer his interest in the trust

creditors cannot reach the trust

exceptions:

• claims for necessities
• claims by US or State
• alimony and child support obligations

Question 21

Discretionary Support Trust

Answer 21

trust where the trustee is given sole/absolute/uncontrolled discretion to make distributions for the beneficiary’s support

the question of whether the trustee can be forced to distribute is subject to the interpretation of the instrument as a whole

Question 22

Pure Discretionary Trust

Answer 22

when there is no condition and trustee has sole discretion to accumulate or distribute, beneficiaries are mostly SOL

• only right beneficiaries have is to have an honest trustee who acts in good faith and with proper motive

exception:

• claims by child, spouse, or former spouse can be ordered by the court

Question 23

Creditor’s Rights

Answer 23

spendthrift trusts for the benefit of the settlor = unenforceable

• creditor can reach any right to distributions settlor has in the trust
• creditors could reach actual trust property if
  
  • settlor has power to revoke OR
  • trustee has discretionary authority to make distributions to settlor

settlor’s creditors have no rights to irrevocable trusts for third persons

• exception: fraudulent transfers doctrine
  
  • trust created with intent of defeating known creditors can be set aside

Question 24

Duties Owed by Trustee

Answer 24

1. duty of loyalty
2. duty to invest prudently
3. duty to preserve and protect trust property
4. duty of impartiality
5. duty to account and inform

Question 25

Duty of Loyalty

Answer 25

no self-dealing by the fiduciary

trustee cannot:

1. buy or sell trust assets to itself
2. borrow trust funds
3. sell assets from one trust to another trust
4. corporate trustee cannot purchase its own stock as trust investment
5. cannot engage in any transaction where she or close family seeks to secure a personal gain

Question 26

Duty to Invest Prudently

Answer 26

must manage property as a prudent investor would

portfolio view = trustee compliance is measured against the trust portfolio as a whole

elements:

1. duty not to commingle
2. duty to balance return with potential risk
3. duty to diversify invsetments
4. duty to keep trust productive

Question 27

Duty to Preserve and Protect Trust Property

Answer 27

insure trust property against casualty losses

Question 28

Duty of Impartiality

Answer 28

must be fair and impartial to all beneficiaries (absent trust provision allowing preference)

Question 29

Duty to Account and Inform

Answer 29

account periodically and keep beneficiaries reasonably informed

Question 30

Power of Trustees

Answer 30

traditional view = except in emergencies, trustees must act unanimously

modern view = trustees may act by majority rule

only required to appoint successor trustees (i.e., trustee died) if the instrument requires it

Question 31

Trustee Liability

Breach of Trust

Answer 31

if trustee has breached a fiduciary duty, beneficiary can:

1. ratify and waive breach
2. sue for resulting loss by surcharge
3. in self-dealing cases, can trace and recover

note: breach is judged separately (each transaction)

Question 32

Trustee Liability

Exculpation Clause

Answer 32

relieving trustee liability for breach of trust

unenforceable to the extent it relieves reckless or bad faith actions or the clause was drafted by or at the direction of trustee and settlor did not have independent counsel

Question 33

Trustee Liability

Torts

Answer 33

traditional rule = trustee is personally liable for all torts of self and agents

UTC = trustee can be sued personally only if trustee was personally at fault; otherwise, you must sue in representative capacity

Question 34

Trustee Liability

Contracts

Answer 34

traditional rule = trustee is personally liable on contracts unless stipulation in contract relieves her of personal liability

UTC = must sue trustee in representative capacity unless trustee failed to reveal her representative capacity when entering contract

Question 35

Co-Trustee and Successor Trustee Liability

Answer 35

co-trustees and successor trustees are not liable for another trustee’s breach unless there is an element of fault (i.e., he participated, was negligent, or failed to use reasonable care)

Question 36

Delegation of Investment Responsibility

Answer 36

trustee may delegate investment decision provided:

1. trustee exercises reasonable care in
2. selecting the agent
3. defining the scope and terms of the delegation AND
4. periodically reviewing the agent’s decisions and actions

Question 37

Trustee Duties for Revocable Trust

Answer 37

so long as a trust is revocable, trustee owes duties only to the trust settlor

Question 38

Trust Accounting

Answer 38

income beneficiaries get the net income and remaindermen get the corpus at termination

receipts:

• income = interest, rents, cash dividends, 10% of annuities/royalties
• corpus = proceeds from sale of res, stock splits, stock dividends

expenditures:

• income = ordinary expenses incurred in production of income
• corpus = extraordinary items, capital improvements, income taxes on sale of trust property
• half/half = trustee’s fee

Question 39

Termination of Trusts

Answer 39

Claflin Doctrine: beneficiaries can terminate trust if:

• all consent (literally ALL) and
• no further trust purpose to be served

spendthrift clauses = make trust indestructible unless:

• consent of all beneficiaries and settlor

many states = all trusts are irrevocable unless stipulated revocable

UTC/modern = all trusts are revocable unless stipulated irrevocable

Question 40

Constructive Trust

Answer 40

implied in a variety of circumstances where a person acquires title to property wrongfully and trust is implied to prevent unjust enrichment

• title acquired by fraud/misrep/duress/mistake
• oral trust of land when acquired by fraud in inducement or through confidential relationship
• secret trust case

Question 41

Powers of Appointment

Answer 41

general POA = donee can appoint in favor of herself, her estate, her creditors, or the creditors of her estate

• residuary clause in will does not exercise a testamentary POA if the will made no reference to the power

specific POA = donee cannot appoint in favor of herself ^^

• if instrument requires specific reference to the power, generic reference will not work

testamentary POA = limited to appointments by will

takers in default = takers of property at death if POA is not exercised