Trusts

Question 1

Trusts Generally

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. The trust must have a valid trust purpose. The trustee ordinarily has legal title to the property, and the beneficiaries have equitable title. The testator or grantor who creates an express trust is the settlor, who must have had the intent to create the trust. Consideration is not required for the creation of a trust; in fact, trusts are usually created gratuitously.

Question 2

REQUIREMENTS OF AN EXPRESS PRIVATE TRUST - Settlor with Capacity and Present Intent to Create a Trust

Answer 2

1. Must intend trust to take effect immediately
2. Must express intent by words or conduct while settlor owns the property
3. Precatory expressions (hope, wish, suggestion) result in inference that no trust was
   intended, but inference may be overcome by other evidence

Question 3

REQUIREMENTS OF AN EXPRESS PRIVATE TRUST - Trustee

Answer 3

1. Failure to name trustee (or failure of trustee to accept or qualify) does not defeat a testamentary trust; court will appoint trustee
2. Inter vivos trust will fail without trustee because there can be no valid delivery and transfer of trust property (see below)
3. Trustee must have duties
4. Settlor may declare himself trustee

Question 4

REQUIREMENTS OF AN EXPRESS PRIVATE TRUST - Trust Property (Res)

Answer 4

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 5

REQUIREMENTS OF AN EXPRESS PRIVATE TRUST - Beneficiaries

Answer 5

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); e.g., “friends” is insufficient
3. Notice not required but beneficiary must accept; acceptance is presumed

Question 6

REQUIREMENTS OF AN EXPRESS PRIVATE TRUST - Valid Trust Purpose

Answer 6

1. 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
2. Effect of invalid condition subsequent—condition stricken, but trust is valid
3. Effect of invalid condition precedent—condition stricken, but court decides
   whether interest is valid or fails

Question 7

REQUIREMENTS OF AN EXPRESS PRIVATE TRUST - Formalities

Answer 7

1. Inter vivos trust—created during settlor’s life
   a. Declaration of trust by property owner that he holds in trust, or
   b. Transfer of property by the settlor to the trustee
   c. No writing required unless trust of land
2. Testamentary trust—created by settlor’s will
   a. Essential terms must be ascertained from will, incorporated document, facts
   of independent significance, or exercise of power of appointment
   b. Secret trust (absolute gift but trust intended)—constructive trust imposed
   c. Semi-secret trust (gift in trust without beneficiary)—resulting trust for testator’s
   heirs

Question 8

CHARITABLE AND HONORARY TRUSTS - Charitable Trusts

Answer 8

1. Purpose must benefit the public (e.g., poverty relief, education, health)
2. Must have indefinite beneficiaries
3. May be perpetual—Rule Against Perpetuities (“RAP”) does not apply
   a. RAP does not apply to limitations that shift beneficial interest from one charity to another (charity-to-charity exception)
   b. RAP does apply to a limitation shifting the interest from private use to charitable or from a charitable use to a private use
4. Enforceable by settlor, a qualified beneficiary, or attorney general
5. Cy pres—if settlor’s intended purpose is impracticable, unlawful, or wasteful, court
   substitutes new charitable purpose
   a. Must find settlor had general charitable intent, not just interested in the
   named charity
   b. Court will select another purpose as near as possible
   c. Uniform Trust Code (“UTC”)—settlor’s general charitable intent is presumed
   and application of cy pres is mandatory

Question 9

CHARITABLE AND HONORARY TRUSTS - Honorary Trusts

Answer 9

1. Not for charitable purpose, but no private beneficiaries who can enforce trust (e.g., trusts for pets, graves)
2. Enforceable by someone named in the trust or appointed by court a. Under UTC, enforceable for 21 years or for life of the animal
3. If property is more than is needed, excess is distributed to settlor or his succes- sors unless trust provides otherwise

Question 10

TRANSFER OF BENEFICIARY’S INTEREST AND CREDITOR’S RIGHTS - Beneficiary’s Equitable Interest Is Alienable

Answer 10

Beneficiary may voluntarily transfer interest in trust, and his creditors may levy on his interest

Question 11

TRANSFER OF BENEFICIARY’S INTEREST AND CREDITOR’S RIGHTS - Spendthrift Trusts

Answer 11

1. Spendthrift trust provides that beneficiary may not voluntarily or involuntarily transfer his interest (i.e., cannot sell or give away interest, and creditors cannot reach it)
2. Not valid if settlor is also a beneficiary
3. Unenforceable against claim brought by government or by child, spouse, or former
   spouse with support order

Question 12

TRANSFER OF BENEFICIARY’S INTEREST AND CREDITOR’S RIGHTS - Discretionary Trusts—Trustee Has Discretion to Pay or Withhold Income or
Principal

Answer 12

1. Before trustee makes discretionary payment, interest cannot be reached by credi- tors
2. After trustee elects to make payments, must pay creditors directly if he has notice—unless there is a spendthrift restriction

Question 13

TRANSFER OF BENEFICIARY’S INTEREST AND CREDITOR’S RIGHTS - Support Trust Cannot Be Assigned or Reached Even Without Spendthrift Clause

Answer 13

A support trust directs the trustee to pay only so much of the income or principal (or both) as is necessary for the beneficiary’s support. This is a discretionary trust with a support standard.

Question 14

MODIFICATION AND TERMINATION OF TRUST - By Settlor

Answer 14

1. UTC: trusts presumed revocable and amendable unless terms expressly state otherwise
   a. Traditional rule: must reserve right to revoke or modify
2. Power to revoke includes power to modify

Question 15

MODIFICATION AND TERMINATION OF TRUST - By Settlor

Answer 15

1. UTC: trusts presumed revocable and amendable unless terms expressly state otherwise
   a. Traditional rule: must reserve right to revoke or modify
2. Power to revoke includes power to modify

Question 16

MODIFICATION AND TERMINATION OF TRUST - By Beneficiaries

Answer 16

1. 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
   1) Examples of purposes precluding termination—distribution at specific age, preserving property for remainderman, protecting beneficiary from own poor judgment
2. Watch for remote unborn beneficiaries—representative can be appointed to represent interests of minor, unborn, or unascertained beneficiaries
3. In most states spendthrift trust cannot be terminated without settlor’s consent

Question 17

MODIFICATION AND TERMINATION OF TRUST - By Court

Answer 17

1. May modify if trust could have been modified if all beneficiaries had consented and interests of nonconsenting 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 impracticable 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 a mistake

Question 18

MODIFICATION AND TERMINATION OF TRUST - By Trustee

Answer 18

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

Question 19

TRUST ADMINISTRATION - Powers of Trustee

Answer 19

1. Powers expressly conferred by trust
2. Powers an individual has over own property unless limited by trust
3. Powers appropriate to achieve investment, management, and distribution of trust
   property not forbidden by trust
4. Powers conferred by UTC unless limited by trust

Question 20

TRUST ADMINISTRATION - Duties of Trustee

Answer 20

1. Duty to administer trust—must act in good faith and in prudent manner, in accordance with trust’s terms and purposes and beneficiaries’ interests
2. Loyalty—no self-dealing
   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
   e. If duty breached, transaction is voidable by beneficiary unless:
   1) Transaction authorized by trust or approved by court;
   2) Beneficiary failed to bring suit within prescribed time period;
   3) Beneficiary consented, ratified transaction, or released trustee; or
   4) Transaction involves contract or claim from before trustee became
   trustee
   f. Settlor can waive self-dealing restrictions
3. Duty to report—keep beneficiaries reasonably informed
4. Duty to separate trust property—no commingling with own property or other
   trusts’ property
   a. Commingled property lost or destroyed presumed to be trustee’s
   b. If portion of commingled assets increases in value, presumed to be trust
   assets
   c. If portion of commingled assets declines in value, presumed to be trustee’s
5. Duty to enforce claims and defend trust from attack
6. Duty to preserve property and make it productive
   a. Investments must be prudent; trustee must use reasonable care, skill, and caution
   1) Trustees with special skills held to higher standard
   2) Trustee must diversify investments
   3) Investment decisions may be delegated if a prudent trustee would do so
   b. Prudence evaluated in terms of overall strategy

Question 21

TRUST ADMINISTRATION - Trustee’s Liability

Answer 21

1. 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; and d. Suspend or remove trustee
2. 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
3. Defenses
   a. Trustee acted in reasonable reliance on trust terms
   b. Beneficiary consented, released trustee from liability, or ratified transaction
4. Exculpatory clauses are void if they relieve trustee of liability for breach committed in bad faith or reckless indifference or appear in trust because of trustee’s abuse of confidential relationship with settlor
5. 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 22

TRUST ADMINISTRATION - Allocation of Receipts and Expenses—Uniform Principal and Income Act
(“UPAIA”)

Answer 22

1. Trustee must administer trust impartially; must be fair to all beneficiaries
2. Interest and dividend income to income beneficiary
   a. If such distribution does not effectuate trust purpose and is unfair, trustee may adjust between principal and income
3. Receipts
   a. Income—rental income, interest on bond or CD, money received from entity,
   liquidating assets and mineral rights—10% rule
   b. Principal—proceeds of sale of asset, eminent domain awards, capital gains,
   property other than money received from entity, insurance proceeds where
   trust is beneficiary, liquidating assets and mineral rights—90%
4. Expenses
   a. Income—one-half trustee and consultant compensation; one-half accounting and legal expenses; ordinary expenses (interest payments on debt, ordinary repairs, taxes, insurance premiums)
   b. Principal—one-half trustee and consultant compensation; one-half accounting and legal expenses; principal payments on debt; environmental costs

Question 23

WILL SUBSTITUTES - Revocable Trusts

Answer 23

1. Interest passes during life but becomes possessory at death
2. Pour-over from will to revocable trust
   a. Trust may be established before, after, or concurrently with will
   b. Trust may be amendable and revocable
   c. Gift is valid even if trust unfunded during settlor’s lifetime

Question 24

WILL SUBSTITUTES - Life Insurance Trusts

Answer 24

1. Contingent beneficiary trust allowed (e.g., “proceeds to A, but if A does not survive, to B in trust for my children”)
2. Assignment of policy trust allowed (assign policy to party to hold in trust)

Question 25

WILL SUBSTITUTES - Totten Trust Bank Accounts

Answer 25

1. Trustee-depositor has full rights during lifetime
2. Revoked by withdrawals, any other lifetime act indicating intent to revoke, or by
   will
3. Subject to depositor’s creditors’ claims
4. Automatically terminates if beneficiary predeceases depositor

Question 26

RESULTING AND CONSTRUCTIVE TRUSTS - Resulting Trusts

Answer 26

1. Purchase money resulting trusts—person taking title did not supply consideration; sole duty is to convey title to one furnishing consideration
   a. No resulting trust presumption if parties closely related
2. Failure of express trust—resulting trust arises with settlor as beneficiary
3. Excess corpus—if trust property remains after purpose fulfilled, resulting trust for
   settlor arises

Question 27

RESULTING AND CONSTRUCTIVE TRUSTS - Constructive Trusts—Equitable Remedy to Prevent Unjust Enrichment

Answer 27

1. Theft or conversion
2. Fraud, duress, undue influence, mistake, or interference with contract relations
3. Breach of fiduciary duty (e.g., attorney/client, director/corporation, trustee/beneficiary)
4. Breach of fraudulent promise, promise by one in confidential relationship, promise concerning will or inheritance, promise to forgo foreclosure bid