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Trusts Flashcards

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1
Q

What is a trust?

A

A trust is a management device with a bifurcated transfer

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2
Q

What does the trustee own? What does the beneficiary own?

A

Trustee: legal title
beneficiary: equitable title

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3
Q

What is the original trust property and any increase in value?

A

principal

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4
Q

What is a revocable trust?

A

a trust that can be revoked at any time during the settlor’s life

+In CA, trusts are presumed to be revocable

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5
Q

When can an irrevocable trust be revoked?

A

usually it cannot. But it can be revoked if the trustee, settlor and all the beneficiaries agree to revoke the trust

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6
Q

What is a mandatory trust?

A

“Trustee to distribute $1,000 every month”
“Trustee to distribute law school tuition for the next three years”

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7
Q

What is a remedial trust?

A

An equitable remedy created due to fraud, duress, undue influence. The trustee’s only duty is to transfer the property

[when there has been fraud, there needs to be a remedy]

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8
Q

What is the general RAP approach to trusts?

A

courts use the “wait and see” approach meaning the interest will not be invalidated until it is clear that it will vest outside the RAP period

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9
Q

What is the person who creates a trust called?

A

settlor

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10
Q

What happens if there is no trustee?

A

the trust will not fail. Instead the court will appoint a trustee or a majority of the income beneficiaries may select a trustee

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11
Q

What are the requirements of an express trust?

A

[PIPA]

  • property
  • intent (not precatory)
  • purpose (ok so long as it is not illegal or contrary to public policy)
  • ascertained beneficiary (unless charitable)
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12
Q

What happens if there are “trust word” such as “in trust” or “for the benefit of?”

A

there is a presumption of a trust

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13
Q

Generally, trusts do not have to be in writing and can be done orally. When must they be done in writing?

A
  • trusts subject to the statute of frauds (i.e., a conveyance of property)
  • trusts created by will (i.e., a pour-over trust)
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14
Q

What happens if there is precatory language?

A

language that expresses the donor’s wishes that the donor use property in a certain way does not create a trust

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15
Q

How do you know if something is a gift or a trust?

A

a trust must involve a bifurcated transfer

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16
Q

A future interest can be sufficient to meet the trust property requirement.

A

o

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17
Q

What do you call a trust without property?

A

empty trust?

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18
Q

What is a pour-over trust?

A

a will that receives and disposes of assets at the settlor’s death

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19
Q

What are exceptions to the requirement that there must be an ascertained beneficiary?

A
  • unborn children are ok

- definite class gifts are ok

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20
Q

What is the requirement of a charitable trust?

A

it must have a charitable purpose. In the past this requirement was more stringent, but modernly the trend is to validate charitable trusts

  • but aid to animals does NOT count
  • but a trust for a group of people that do most activities with the settlor likely does not count as it must benefit society generally
  • should not name people
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21
Q

What happens if the trust’s charitable purpose is no longer possible?

A

through the cy pres doctrine, courts can modify a trust to create a new purpose as close as possible to the original purpose

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22
Q

Who has standing to enforce the terms of a charitable trust?

A

the AG and the settlor

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23
Q

What is an express trust?

A

a trust that clearly states the intention of the settlor to transfer property to a trustee for the benefit of one or more ascertainable beneficiaries

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24
Q

What are the two types of remedial trusts?

A

resulting

constructive

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25
Q

When is a resulting trust used?

A

when a trust fails and the trustee must return the property to the settlor or the settlor’s estate

Exs: when someone who is being cared for in a trust dies, when an org that was funded by a trust ends, the trust is illegal

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26
Q

What is a purchase-money resulting trust?

A

when person one pays for the property, but title is taken in person two’s name. If person two is not a close friend or relative, a court will create a purchase-money resulting trust

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27
Q

How do you avoid a resulting trust?

A

use a gift-over clause

Ex: Oliver’s will provides that if Archer dies without children, the remaining trust property is to go to Henry or Henry’s heirs.

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28
Q

What is a constructive trust?

A

a remedy used to prevent unjust enrichment if a third party who took advantage of the settlor through wrongful conduct (fraud, undue influence, duress, breach of duty etc)

29
Q

What is a discretionary trust?

A

“Trustee to make payments for the health and care of beneficiary”

30
Q

What is a support trust?

A

“Trustee to make distributions for the support of the beneficiary”

31
Q

When can a creditor of a beneficiary reach trust principal or income?

A

only when such amounts become payable to the beneficiary OR subject to the beneficiary’s demand

32
Q

Generally, a beneficiary’s equitable interest in trust property is freely alienable

A

o

33
Q

What is a spendthrift trust?

A

a trust that expressly restricts the beneficiary’s power to alienate her interest

+Creditors usually cannot reach the trust interest, unless money is owed for child/spousal support, basic necessities providers, or tax lien holders
+Language such as “the interests of the beneficiaries are inalienable and not subject to the claims of creditors”

34
Q

Generally, creditors cannot reach trust property. What are the exceptions?

A
  • spousal or child support
  • those providing basic necessities
  • holders of federal or state tax liens
35
Q

What happens if the beneficiary wants to terminate a trust prematurely and trustee opposes termination? This is happening when the settlor is no longer alive

A

A trustee can block premature termination if the trust is still serving some material purpose.

36
Q

When can a trust be modified due to changed circumstances (and the settlor is dead)?

A
  • all beneficiaries agree and modification is consistent with the material purpose of the trust OR
  • an unforeseen event frustrates the purpose of the trust
37
Q

When is involuntary removal of a trustee likely to be granted? Remember that courts are hesitant to do this

A
  • trustee became incapable of performing duties (illness, incapacitation, jail)
  • material breach of duty
  • trustee develops a conflict of interest
  • a serious conflict between a trustee and a beneficiary
  • the trust persistently performs poorly as a result of the trustee’s action or inaction
38
Q

When can a trustee resign?

A
  • as provided by the trust instrument
  • in the case of a revocable trust, with the consent of the person holding the power to revoke the trust
  • in the case of a trust that is not revocable, with the consent of all beneficiaries OR
  • pursuant to a court order obtained on petition by the trustee
39
Q

What was the old rule regarding the trustee’s management of the trust?

A

the life beneficiary was entitled to income (any money generated by investing)

The holder of the remainder interest was entitled to the principal

40
Q

What is the modern rule regarding the trustee’s management of the trust?

A

the trustee is to focus on the total return of the trust portfolio. Allocations must be reasonable

41
Q

What are factors that the trustee must balance?

A

[BI PET]

  • identities and circumstances of the Beneficiaries
  • Intent of settlor
  • nature, duration, and Purpose of the trust
  • anticipated effect of Economic conditions
  • anticipated Tax consequences

[overall the trustee is given significant flexibility]

42
Q

What does a future interest holder have?

A

a present equitable interest. Therefore the possessor has standing to challenge the trustee’s management

43
Q

What is the future interest held by the grantor following a life estate?

A

reversion

44
Q

What is a future interest held by a transferee (not a grantor) capable of becoming possessory at the natural termination of the prior estate?

A

remainder

45
Q

In determining the trustee’s powers, where is the source?

A

1) look to the trust documents
2) if silent on this issue, then refer to the statutory and common-law principles

-the modern trend is to grant the trustee all those powers necessary to act as a reasonably prudent person

46
Q

What are the duties of the trustee?

A

[the trustee PLACED-D the check]

  • to make property productive
  • loyalty
  • to account
  • care (ordinary prudent person)
  • equal treatment
  • to distribute in accordance with the trust/settlor
  • to disclose
47
Q

What question is asked when there is an issue regarding the trustee’s duty of loyalty?

A

Did the trustee act reasonably? This is an objective standard

48
Q

What is the standard when judging the trustee’s duty of care?

A

ordinary prudence

  • the trustee should treat the trust property as his own
  • the standard of care is heightened if the trustee has special skills
49
Q

What is the no further inquiry rule?

A

If the trustee engaged in self-dealing, the court does NOT inquire into the
reasonableness or good faith. This is a per-se breach and creates an irrebuttable presumption of breach

50
Q

What is the standard used when the trust document allows self-dealing?

A

the transaction must still be reasonable and fair for the trustee to avoid liability

51
Q

What is the standard when judging a conflict of interest (that is non-self-dealing)?

A

reasonable AND good faith test

52
Q

What are the common law and modern views on delegation by a trustee?

A

common law: a trustee could not delegate authority

modern law: delegation is permitted

53
Q

What are the common law and modern views on investments by a trustee?

A

common law: a trustee breached by making investment outside a specific list of acceptable investments

modern view: a trustee has discretion to invest and manage property as would a prudent investor (diversified and success is measured by the success of the portfolio as a whole)

+argue both sides for why this investment was appropriate or not

54
Q

What is the duty of impartiality?

A

the trustee has a duty to balance the competing interests of present and future beneficiaries fairly

55
Q

How long can a trustee serve?

A

the noncharitable trustee may serve, for only 21 years after the settlor’s death

56
Q

What is a testamentary trust?

A

a trust that is created by a will and the will contains the material provisions of the trust

57
Q

What is an honorary trust?

A

a trust in which there is neither a private beneficiary nor a charitable trust. Generally invalid except to care for pets or maintain cemetery plots

58
Q

What are the majority and minority rules on a settlor revoking a trust?

A

majority: only if the power is expressly reserved in the trust can the settlor modify or revoke the trust

minority (CA): trusts are generally revocable

59
Q

What are ways to challenge the validity of a trust?

A
  • undue influence (SMOC, presumption)

- fraud (inducement, execution)

60
Q

What are the types of beneficiaries?

A

income beneficiary: the person who receives income from the trust

remainder beneficiary: the person who is entitled to the trust principal upon termination of trust

61
Q

How can a trustee block a trust from terminating?

A

by showing that there remains an “unfulfilled material purpose”

62
Q

How does a trust terminate?

A
  • if settlor is deceased, by consent of all the beneficiaries
  • by the court if its purpose is illegal, impracticable, impossible
  • automatically when the trust purpose has been accomplished
63
Q

What is the duty to account?

A

Periodically account for actions taken on behalf of the trust so that trustee’s performance can be assessed against the terms of the trust

64
Q

What is the duty to disclose?

A

Disclose complete and accurate information about nature and extent of
the trust property, including allowing access to trust records and accounts.

65
Q

What are some examples of self-dealing?

A
  • borrowing from or making loans to the trust
  • using trust assets to secure personal loans
  • acting for personal gain through trustee position

Ex: a trustee living in the house for free

66
Q

What are the remedies for a violation of a trustee’s duties?

A

beneficiaries may:

  • Sue the trustee for money damages or disgorgement
  • Trace and recover property
  • Discharge and replace the trustee
  • Ratify the transaction and waive the breach

[STD-R]

67
Q

How is a trust revoked?

A

1) substantial compliance with a method provided in the trust’s terms
2) if not set out by the trust
- a later will or codicil
- any other means that provides clear evidence of the settlor’s intent

68
Q

What is a future interest created in an ascertainable grantee that is capable of becoming possessory upon the expiration of a known fixed duration and is not subject to any conditions precedent

A

vested remainder

69
Q

for cy pres to apply, the purpose of the trust must be charitable.

A

o

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