Trusts

Question 1

Rule for Trust formation

Answer 1

A valid trust requires a beneficiary, a settlor with capacity, intent to create a trust, a trustee, trust property, a valid trust purpose, and compliance with State formalities.

Question 2

Rule for witness of the creation or modification of a trust

Answer 2

Two witnesses are not required to create or amend a trust. Under the UTC, no execution formalities are required.

Question 3

Rule for Trustee of a trust

Answer 3

The Trustee must have duties to perform and the same person CANNOT be sole trustee and sole beneficiary.

A trust will not fail because that person refuses to act as trustee, dies, is removed, or resigns. In such instances the court will appoint a new trustee.

Question 4

Rule for Trust without property

Answer 4

A trust is not created until it receives trust property (res). The trust property does not need to be substantial and does not have to be contemporaneously transferred with the signing. A trust is valid if signed during the settlor’s lifetime and property may be transferred after, even after the settlor’s death (thru a pour-over provision in a will).

Question 5

Rule for revocable or irrecovable trust

Answer 5

The majority view is that trusts are irrevocable unless expressly stated otherwise. The minority view, and under UTC, is that a trust is revocable unless otherwise stated.

Question 6

Rule for creation of a Testamentary Trust

Answer 6

A testamentary Trust is created through the provisions of a settlor’s will and does not take effect until the settlor’s death.

Question 7

Rule for pour-over provision in a will

Answer 7

Unlike a testamentary trust, a pour-over provision in a will does not create a trust, but gifts property to a previously established trust. The property is distributed according to the terms of the trust. As such, a pour-over will must be connected to an inter vivos trust (trust made during the testator’s life).

Question 8

Rule for gift in a pour-over provision to a trust that has been revoked or terminated

Answer 8

Unless otherwise provided, in a will, a revocation or termination of the trust before the testator’s death causes the gift to lapse.

Question 9

Rule for when settlor retains control over the res

Answer 9

When the settlor retains significant control over the trust property indicating lack of intent to creat a trust, the trust will be deemed illusory and invalid.

Question 10

Rule for discretionary trust

Answer 10

A discretionary trust occurs when a trustee has absolute discretion and power to determine when and how much of the trust property is distributed to the beneficiaries of the trust. The trustee must exercise this discretion in good faith, or the court may interfere.

Question 11

Rule for a support trust

Answer 11

A support trust is a trust that contains a provision directing the trustee to pay the beneficiary as much income and principal as necessary for the beneficiary’s support. A support trust may be pure (trustee has no discretion) or discretionary.

Question 12

Rule for Cy Pres doctrine

Answer 12

The Cy pres doctrine applies to charitable bequests and charitable trust. This only applies if the testator has a general charitable intent. Courts will apply cy pres to modify a charitable trust to be consistent with and as near as possible with the settlor’s intent if the purpose of the trust is frustrated (unlawful impractical, impossible, or wasteful).

Question 13

Rule for general charitable intent.

Answer 13

A settlor has general charitable intent when the settlor provides a particular charitable PURPOSE, rather than a specific charity. This is presumed in a majority of courts and under the UTC.

Question 14

Rule for spendthrift provision in a trust

Answer 14

A spendthrift provision means that the interest cannot be sold or assigned by the income beneficiary, nor may creditors reach it. Such provision in a trust is valid only if it restrains both voluntary and involuntary transfers.

Spendthrift trust do not provide protection for mandatory distributions of trust property.

Question 15

What are the 5 exceptions to when a creditor can pierce a spendthrift provision in a trust

Answer 15

1) a judgment creditor who provided services for the protection of the beneficiary’s interest in the trust;
2) a creditor who furnishes necessities;
3) an order for child support or alimony;
4) a claim by the state or federal government;
5) a self-settled trust where the settlor retains an interest.

Question 16

Rule for creditor compelling distribution from a spendthrift trust

Answer 16

Whether or not a trust contains a spendthrift provision, a creditor cannot compel a distribution to a beneficiary that is subject to the trustee’s discretion. A creditor can collect directly from the beneficiary after payment is made from the trust.

Question 17

Rule for ordering a distribution from a spendthrift trust for child support or alimony

Answer 17

If a judgment or order exists against the beneficiary for unpaid spousal or child support, the court may order a distribution to satisfy the judgment AND order the trustee to pay the support ordered.

Question 18

Rule for terminating a trust

Answer 18

Under the UTC, a trust may be terminated when:

1) it is revoked or expires by its term;
2) the material purpose of the trust has been achieved;
3) the trust has become unlawful, contrary to public policy or impossible;
4) the settlor and all beneficiaries consent;
5) all beneficiaries consent and the court decides that continuance is not necessary to achieve any purpose of the trust;
6) termination would further the purpose because unanticipated circumstances;
7) the court applies cy pres to terminate the trust;
8) the court or trustee determines the res is insufficient to justify the cost of administration.

Question 19

Rule for a trust prohibiting a marriage or requiring a divorce

Answer 19

A condition on a gift in a will or trust that prohibits a first marriage or requires divorce are void as against public policy. (Can restraint remarriage of surviving spouse.)

Question 20

Rule for trustee duty to administer the trust

Answer 20

Until the trust terminates and remainderman are determined, the trustee must continue to administer the trust with:

• -Common Law: the duty to act in good faith with care, skill, and prudence.
• -UTC: in good faith in accordance with the trust purpose and terms and in the interest of the trust beneficiaries.

Question 21

Rule for trustee duty of loyalty / self-dealing

Answer 21

A trustee must administer the trust solely in the interest of the beneficiary and cannot engage in self-dealing. A transaction for the trustee’s own benefit or affected by a conflict of interest is voidable by the beneficiary. (Exceptions apply)

Question 22

What are the exceptions allowing trustee’s self-dealing

Answer 22

A beneficiary can seek damages for a trustee’s self-dealing. Self-dealing is allowed:

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

Question 23

Rule for trustee’s duty of care for prudent investing

Answer 23

the Prudent Investor Rule requires that a trustee exercise the degree of care, skill, and prudence of a reasonable investor would in investing his own property. This includes diversifying and avoiding risky investments.

Question 24

Factors to consider in whether trustee has violated the duty to act as a prudent investor

Answer 24

Factors in assessing whether a trustee breached the duty to act a as a prudent investor:

1) the distribution requirements of the trust;
2) general economic conditions;
3) the role the investment plays in the trust’s overall investment portfolio; and
4) the trust’s need for liquidity, regularity of income, and preservation or appreciation of capital.

Question 25

Rule for a class gift in a trust

Answer 25

A class gift is a gift to a group of person described collectively. The terms “children” and “issue” are interpreted according to intestate succession rules. Class gifts generally close at the death of the testator/settlor.

Question 26

rule for predeceased members of a class in a class gift

Answer 26

Distribution of a gift to a predeceased class member depends on the class description and whether there is an anti-lapse statute. For a gift to a class group, such as “my children”, the predeceased member’s share is divided among the other members - unless there is a contrary provision or an anti-lapse statute. A gift to a specifically named class member lapses and goes into the residuary of the estate.

Question 27

rule for Rule of Convenience for class gifts

Answer 27

Under the Rule of Convenience, the class is closed when any member of the class is entitled to possession of the gift.

Question 28

Rule for amending a revocable Trust

Answer 28

If a settlor has the power to revoke, the retained power ordinarily includes a power to modify as well. A revocable trust may be amended at any time prior to the settlor’s death. This amendment applies to trust assets conveyed to a will, even if the will was executed prior to the amendment.

Question 29

Rule for when period when RAP begins to run concerning a trust

Answer 29

For a revocable trust, the period during which the RAP requires interests vest begins to run when the Settlor no longer has power of revocation, not on the date which the trust was created.