Trusts Flashcards

1
Q

A trust of personal property is valid if it has:

A

A trustee, a beneficiary, and trust property.

Trustee: manages the trust property and holds it for the benefit of the beneficiaries. A trust will not fail for lack of a specifically appointed trustee (court will appoint one).

Beneficiary: in a private express trust, beneficiaries must be definite and ascertain able. Further, the same person cannot be the sole trustee and the sole beneficiary or the trust collapses.

Trust property (trust res): must be identifiable.

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2
Q

Under the Uniform Trust Code, the default rule is that a trust is ___.

A

Revocable.

An irrevocable trust can still be terminated or modified in some circumstances.

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3
Q

Presumption of revocability—trusts.

A

Under the UTC, an inter vivos trust is revocable unless the instrument expressly states otherwise.

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4
Q

Termination of trust by settlor:

A

Settlor may terminate the trust if all beneficiaries are in existence and all agree to the termination

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5
Q

Termination of trust by beneficiaries after settlor dies:

A

Generally, even an irrevocable trust can be terminated if both the income beneficiaries and the remaindermen (1) unanimously consent and if there is (2) no material purpose of the trust yet to be performed.

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6
Q

Pourover will

A

A will that makes a gift to a trust is valid so long as the trust is identified in the will and the terms are incorporated in a writing executed before or concurrently with the execution of the will.

Under the modern approach, later-made amendments to the trust are valid.

Under common law, amendments made after execution of the will are not valid.

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7
Q

Discretionary trust

A

Trustee has discretion to decide when to make a distribution to a beneficiary. The beneficiary cannot demand any part of the income or principle. Nor can a creditor, unless it shows the trustee acted dishonestly or in a state of mind “not contemplated” by the settlor.

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8
Q

Support trust

A

Trustee must pay what is necessary for the beneficiary’s support.

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9
Q

Spendthrift trust

A

Restrains both the voluntary and involuntary transfer of a beneficiary’s interest.

Generally, a creditor may not reach part of a beneficiary’s distribution prior to the beneficiary reaching it.
- exceptions: (1) child or spousal support creditor; (2) judgment creditor; (3) claim of the state or United States; (4) claims for necessaries.

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10
Q

Charitable trust

A

May be created for a charitable purpose (poverty, education, religion, health, governmental/municipal purposes, etc.). It must have a large number of not readily identifiable individuals (rather than a few identifiable individuals). Not subject to RAP.

A charitable trust may terminate if the charitable purpose becomes unlawful, impracticable, or impossible. However, cy pres may save the trust.

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11
Q

Cy pres

A

Common law doctrine that is also part of the UTC.

If a particular charitable purpose has become unlawful, impracticable, or impossible to achieve; no alternative charity is named in the trust; and the court finds that the settlor had general, rather than specific, charitable intent, then the court may apply cy pres to modify or terminate the trust by directing that the trust property be distributed in a manner consistent with the settlro’s general charitable intent.

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12
Q

Honorary trust

A

Trust that does not have a charitable purpose or a definite beneficiary. Often a trust to take care of a thing (e.g., cemetery plot) for a non charitable purpose. Under the UTC, this is valid but may not be enforced for more than 21 years. Under common law, such a trust would not be valid if it violates RAP, but a court may characterize the trust as a power and allow the trustee to exercise that power in accordance with the trust terms for 21 years.

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13
Q

Duty of loyalty

A

Trustee has a duty of loyalty to act in the best interest of the beneficiaries.

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14
Q

Duty of care

A

Prudent administration.

Uniform Prudent Investor Act (UPIA) states that a trustee must “administer the trust as a prudent person would using reasonable care, skill, and caution.”

A trustee’s investment and management decisions with respect to individual assets should be evaluated in the context of the portfolio as a whole and as a part of an overall investment strategy rather than in isolation.

Duty to diversify—trustee not liable for declines in value due to a downturn resulting from general economic conditions, but is liable for failure to diversify absent directions to the contrary.

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15
Q

Remedies for a breach of trust:

A

Suspending or removing a trustee
Decreasing compensation
Compelling a trustee to perform trust duties
Compelling payment of damages

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16
Q

In a self-dealing case, the trust beneficiaries may:

A

Rescind the transaction and ask for the self-dealing purchase to be set aside (trust property is returned to the trust and the amount paid is refunded by the trust) or recover any profits the trustee made by reason of the breach.

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17
Q

A person writing a will or trust can give her beneficiaries a power of appointment, which ____.

A

Enables the beneficiary to designate who will receive specific property.

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18
Q

General power of appointment

A

The class of people that the beneficiary can exercise the power of appointment in favor of is unlimited (herself, creditors, etc.).

Majority view: general residuary clause in a will (“I give all of my estate…”) does not exercise a power of appointment. However, if the clause is coupled with a blanket exercise clause (“including all property over which I have a power of appointment”), any power of appointment held by the donee is exercised, unless the donor of the power specifically requires reference to it.

Minority: general testamentary power of appointment can be exercised by general language in the beneficiary’s will (residuary clause) even if it makes no reference to the power in the instrument (“everything to my husband”—the husband will get it), unless the creating instrument of the power made an express gift in default of the instrument stated that the power needed to be specifically mentioned.

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19
Q

Special (or limited) power of appointment

A

The class of people that the beneficiary can exercise the power in favor of is limited. A special testamentary power needs to be specifically exercised. The UPC adopts a substantial compliance rule which says that if it can be shown that the power holder intended to exercise a power, a blanket exercise clause may be sufficient.

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20
Q

Rule of convenience approach to giving gifts to a class

A

When a gift is made to a group, such as “my children,” the class closes when at least one member is entitled to distribution.

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21
Q

UPC approach to giving gifts to a class

A

When a class gift is made, each living beneficiary will take their share and the deceased beneficiary’s share will pass to their surviving descendants. (If there are no surviving descendants then the gift will fail.)

Note: this applies even if the beneficiary is not related to the settlor (and thus differs from most anti-lapse statutes).

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22
Q

Common law approach to giving gifts to a class

A

If the gift or remainder to a deceased beneficiary has already vested and there is no applicable statute, then it will go to whomever the instrument says it should go to or whomever the deceased person has specified in their will or through intestacy.

This also applies to gifts that are not made to classes.

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23
Q

If you see a gift to a class in a Decedents’ Estates question:

A

If a testator gives a gift to a group of unrelated individuals and one predeceased him, the deceased would not take, and neither would his descendants, unless the antilapse statute saved the gift.

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24
Q

What is a trust?

A

An arrangement under which the trustee holds legal title to property for the benefit of the beneficiaries. Trustee has burdens and beneficiaries have benefits of property ownership. Trustee is subject to fiduciary standards; he is not privileged to use trust property as his own. Harsh “self-dealing” rules preclude trustee from doing so.

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25
Q

Delivery requirement

A

Does not apply to self-declaration of trust (“I hereby declare myself trustee…”) or testamentary trust.

For inter vivos trust with third party as trustee, there must be delivery of subject matter of the trust.

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26
Q

A trust may be created for any purpose that is not

A

Illegal, contrary to public policy, or impossible to achieve

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27
Q

Intent to create a trust:

A

Precatory (permissive language) does not create a trust—“it is my wish and my desire.”

Needs to show intent to require a use, not suggest a use. Or intent to impose a duty.

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28
Q

The “res” requirement

A

In order to have a trust, there must be a specific interest in property to which the trustee’s duties relate, such that the beneficiary who is dissatisfied with the trustee’s performance can say “you are not doing your job with respect to these assets.”

The subject matter of the trust must be certain and identifiable. If there is no certain and identifiable trust property, there is no trust!

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29
Q

Are choses in action and accounts receivable sufficient to support a trust?

A

Yes, they are interests in property and are thus sufficient even though they are intangible.

Ex: B states “I hereby declare myself trustee of the debt which A owes me, said trust to be for the benefit of C.”

NOT: A states “I hereby declare myself trustee of the debt which I owe to B.”

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30
Q

Gratuitous promise to create a trust in the future:

A

When a promise to create a trust is gratuitous (not supported by consideration), a trust arises when all elements of a valid trust have been met if, but only if, at that subsequent time the settlor manifests an intention then to create the trust.

Indicia of trust might include: distribution of income to beneficiary; or keeping records like a trustee would.

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31
Q

A private trust must have ____.

A

Ascertainable beneficiaries.

Ex: “friends” is not an ascertainable class.

Traditionally, a trust invalid for want of definite beneficiaries cannot be given effect as a power of appointment. However, today it can.

If class is defined, shares may be left to discretion of the trustee.

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32
Q

Do beneficiaries have to be alive?

A

No—unborn beneficiaries can be represented by guardian ad litem. If the class is never filled, money will be returned to the settlor’s estate by resulting trust.

33
Q

Resulting trust

A

Reversionary interest that arises when all or part of a trust fails. Property goes back to the settlor, the trust creator.

34
Q

Are revocable trusts valid?

A

Yes, even though the settlor retains the right to revoke, alter, or amend the trust, keeps an income interest or other interests in the trust as beneficiary, retains a power of appointment over the trust corpus or retains everyday control over the trust either by naming herself trustee or by retaining veto power over the trustee’s decisions.

35
Q

Is a gift by will to a revocable, amendable trust valid?

A

Yes—Uniform Testamentary Additions to Trust Act.

The only requirements are that the trust be identified in T’s will and its terms set out in a written instrument. The instrument may be executed before, concurrently with, or after the will. The devised property is added to the trust as it exists at T’s death, including any amendments after the will was executed, even though the trust amendments were not executed with testamentary formalities.

36
Q

What happens if T revokes the trust before she dies and her will included a gift to the trust?

A

The gift to the trust in the will lapses.

37
Q

Oral inter vivos trusts

A

An oral inter vivos trust of personality is enforceable provided its terms can be established by clear and convincing evidence. However, trusts containing land (whether created by declaration of trust or by inter vivos transfer) must be evidenced by a writing that satisfies the Statute of Frauds.

38
Q

Constructive trust

A

Remedy imposed by a court to prevent unjust enrichment as the result of wrongful conduct like fraud, undue influence, or breach of fiduciary duty.

May be imposed where (1) fraud in inducement—person promises to serve as trustee when they have no intention to perform on that promise; or (2) confidential relationship: grantee-trustee served in confidential relationship to grantor-settlor.

39
Q

Oral promise (supported by consideration) to make devise in will:

A

Majority: with respect to personal property, oral contracts to make a will are enforceable provided their terms can be established by clear and convincing evidence. Contracts to devise land must be in a SOF writing.

UPC: any contract to make a will, not to revoke a will, or to die intestate, can only be shown if (1) the terms are in the will itself (2) the terms are in a written contract or (3) the will refers to the contract and extrinsic evidence proves the terms.

40
Q

Four distinctive rules that apply to charitable trusts:

A
  1. Not subject to RAP or Rule Against Accumulations (can last and accumulate income perpetually)
  2. Must be for charitable purpose
  3. Must be in favor of a reasonably large number of unidentifiable beneficiaries.
  4. When specific charitable purpose can no longer be accomplished, may be reformed under cy pres doctrine.
41
Q

What trust is created when it provides that: “No interest of any beneficiary herein shall be assignable by such beneficiary nor shall it be subject to the claims of the beneficiary’s creditors.”

A

Spendthrift trust.

42
Q

What kind of trust is created with the provision: “to distribute or apply the income for the support of my husband during his lifetime to the extent necessary in the sole discretion of my trustee.”

A

Discretionary support trust.

Trustee has a duty to support the beneficiary from the income of the trust if he can’t support himself. May take into account other resources available to the beneficiary for support.

Courts are reluctant to question a trustee’s decisions when the trustee has been given extended discretion (“sole,” “absolute,” or “uncontrolled”).

43
Q

What kind of trust is created with provision: “to accumulate or distribute income to my husband in the discretion of my trustee.”

A

Pure discretionary trust.

Beneficiary’s only right is to have an honest trustee who acts in good faith with proper motive.

44
Q

Prudent Investor Rule

A

Except as otherwise provided by the terms of the trust, a trustee must manage property as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust and by pursuing an overall investment strategy reasonably suited to the trust. A trustee must adhere to a standard of reasonable care, skill, and caution in making investment decisions.

  1. Duty not to commingle
  2. Duty to balance return with potential risk
  3. Duty to diversify investments
  4. Duty to keep trust productive
45
Q

Liability for breach of trust

A

Whenever trustee breaches fiduciary duty, beneficiary has a choice of options:

  1. Ratify the transaction and waive the breach
  2. Sue for the resulting loss.
  3. In self-dealing cases, he can trace and recover the property for the trust.
46
Q

To create a valid trust, there must be…

A

A (1) settlor who, (2) intending to create a trust for a valid (3) trust purpose, (4) delivers the trust property to the (5) trustee to hold for the benefit of one or more (6) beneficiaries.

47
Q

Do the beneficiaries need to be identified at the time a trust is created?

A

No, but they must be susceptible of identification by the time their interests are to come into enjoyment.

48
Q

May the trust beneficiaries be a class?

A

Yes, provided that the class is sufficiently definite.

49
Q

Can the settlor allow the trustee in its discretion to select the members of a class?

A

Yes, as long as the class is reasonably definite.

50
Q

What happens if the beneficiary class is too broad?

A

The trust, or a portion thereof, may be invalid for lack of definite beneficiaries. Should go to the residuary beneficiary.

51
Q

Does a remainder beneficiary’s judgment creditor have a right to immediate payment from the trust?

A

Except as otherwise provided by statute or as validly restricted by the terms of the trust instrument (spendthrift provision), the interest of an insolvent trust beneficiary can generally be reached in appropriate proceedings to satisfy the claims of his creditors. However, the creditor reaches only the interest of the beneficiary and not the trust property itself.

52
Q

When does the cy pres doctrine apply?

A

When a specific charitable purpose indicated by the settlor is no longer possible or practical, and the settlor manifested a general charitable intent.

In such a case, the court can direct that the trust property be applied to another charitable purpose as close as possible to the original one, rather than permit the trust to fail and become a resulting trust.

53
Q

A trust of personal property is valid if it has:

A

A trustee, a beneficiary, and trust property.

Trustee: manages the trust property and holds it for the benefit of the beneficiaries

Beneficiary: must be definite and ascertainable.

Trust property: must be identifiable

54
Q

Can the same person be the sole beneficiary and the sole trustee?

A

No.

55
Q

An inter vivos trust is ___ unless ___.

A

Revocable; the instrument expressly states otherwise

56
Q

Termination by settlor

A

Settlor may terminate if (1) all beneficiaries are in existence and (2) all agree to termination.

57
Q

Termination by beneficiaries after settlor’s death

A

Beneficiaries and remaindermen (1) unanimously consent and (2) there is no longer a material purpose of the trust.

58
Q

Pourover will

A

Will that makes a gift to a trust is valid if the trust is (1) identified in the wills and (2) the terms are incorporated in a writing executed (3) before or concurrently with the execution of the will.

Common law: amendments made after execution are not valid.
Modern view: later-made amendments to the trust are valid.

59
Q

Support trust

A

Trustee must pay what is necessary for the beneficiary’s support.

60
Q

Discretionary trust

A

Trustee has discretion to decide when to make a distribution to a beneficiary.

Beneficiary cannot demand any part of the income or principle, neither can a creditor.

61
Q

Spendthrift trust

A

Restrains both the voluntary and involuntary transfer of a beneficiary’s interest.

62
Q

Creditor rights to a spendthrift trust

A

Creditor may not reach part of a beneficiary’s distribution prior to the beneficiary reaching it.

Exception: child/spousal support; judgment creditor that provided services for the protection of the beneficiary’s interest in the trust; claim by the U.S. or a state; claims for necessaries.

63
Q

Charitable trust

A

Created for a charitable purpose. Must have a large number of not readily identifiable individuals.

64
Q

When may a charitable trust be terminated?

A

If the purpose becomes unlawful, impracticable, or impossible to achieve.

Note: cy pres doctrine

65
Q

Cy pres doctrine

A

When the purpose of a charitable trusts has ended, no alternative charity is named and the settlor had a general, rather than specific, charitable intent, cy pres can be applied to distribute trust property in a manner consistent with the settlor’s general charitable intent.

66
Q

Trustee has what duties?

A

Loyalty and care

67
Q

Trustee’s duty of loyalty

A

Act in the best interest of the beneficiaries.

68
Q

Trustee’s duty of care

A

Prudent administration of the trust.

Uniform Prudent Investor Act: trustee must administer the trust as a prudent person would using reasonable care, skill, and caution—evaluated in the context of the portfolio as a whole.

Duty to diversify.

69
Q

Power of appointment

A

A person writing a will or trust can give her beneficiaries a power of appointment.

Enables the beneficiary to designate who will receive specific property.

Can be general or specific

70
Q

General power of appointment

A

Class of people that can receive specific property is unlimited.

Majority view: General residuary clause (“I give all my estate…”) does not exercise a power of appointment. Need above language + “including all property over which I have a power of appointment”

Minority view: general language will convey power of appointment.

71
Q

Special power of appointment

A

Class of people that the beneficiary can exercise the power of appointment in favor of is limited.

72
Q

When does the class close for a class gift?

A

When at least one member is entitled to distribution.

UPC: each living beneficiary will take their share and the deceased beneficiary’s share will pass to their surviving descendants, even if the beneficiary is not related to the settlor.

73
Q

If a testator gives a gift to a group of unrelated individuals and one predeceased him, does the deceased take?

A

No, and neither does his issue (unless anti-laps statute saves it).

74
Q

Will a trust fail for lack of a trustee?

A

No—the court can appoint one.

75
Q

Can a settlor revoke or amend a trust?

A

Yes, under the Uniform Trust Code, unless the terms expressly state that it is irrevocable.

Common law states require that the settlor reserve the power to revoke and amend. Trust is irrevocable unless the instrument says otherwise.

76
Q

The power to revoke also includes the power to:

A

Amend.

77
Q

Power of appointment is…

A

An authority created in a donee enabling the donee to designate, within the limits prescribed by the donor of the power, the persons who shall take certain property and the manner in which they shall take it.

A general power of appointment is exercisable in favor of the donee, her estate, her creditors, or the creditors of her estate.

A special power of appointment, on the other hand, is exercisable in favor of a specified class of persons that does not include the donee, her estate, her creditors, or the creditors of her estate.

78
Q

Presently exercisable power of appointment

A

Exercisable by the donee during her lifetime.

79
Q

Testamentary power of appointment

A

Exercisable only by the donee’s will.