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MEE Subjects > Trusts > Flashcards

Trusts Flashcards

1
Q

What is a trust?

A

A trust is a fiduciary relationship in which a trustee holds legal title to specific property and the designated beneficiaries hold equitable title.

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2
Q

What are the trustees duties?

A

Fiduciary duties to

  • Deal with the property with reasonable care
  • Maintain the utmost degree of loyalty
  • Be personally responsible if their conduct falls beneath the required standards
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3
Q

Define settlor

A

The person who causes the trust to come into existence

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4
Q

What are the purposes and uses of trusts

A
  • Providing for and protecting trust beneficiaries
  • Flexibility of asset distribution
  • Protection against settlor’s incompetence
  • Professional management of property
  • Probate avoidance
  • Tax benefits
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5
Q

What are express trusts?

A

Trusts created by the express intention of the settlor

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6
Q

What are the types of express trusts

A

Private trusts- private beneficiaries who are an ascertainable class of people

Charitable trusts- Charitable beneficiaries (indefinite class or people or general public)

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7
Q

What are the types of trusts created by operation of law?

A

Resulting trusts- Arise from the presumed intention of the owner of the property

Constructive trusts- An equitable remedy used to prevent unjust enrichment

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8
Q

What are the five elements of a valid trust?

A
  • Intent
  • Identifiable corpus (that the settlor currently owns)
  • Ascertainable beneficiaries
  • Proper purpose
  • Mechanics and formalities
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9
Q

What is required to have valid intent to create a trust?

A
  • A settlor with capacity to convey
  • A present intent to create a trust relationship
  • A competent trustee with duties
  • A definite beneficiary
  • The same person cannot be the sole trustee and the sole beneficiary
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10
Q

What are precatory expressions?

A

Statements by the settlor of hope, wish, or suggestion for how property be used

Ex: I hope you will use this money to pay for your college tuition

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11
Q

Do precatory expressions create a trust?

A

There is an inference that they do not. The settlor must impose a legal obligation on the transferee, not merely a moral one

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12
Q

Define qualified beneficiary

A

Someone who, on the date the beneficiary’s qualification is determined is

  • A current beneficiary OR
  • A first-line remainderman (one who would become eligible to receive distributions were the event triggering the termination of a beneficiary’s interest or of the trust itself to occur on the qualification date
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13
Q

What is disclaimer and what is required to disclaim?

A
  • Disclaimer is saying that you don’t want a trust
  • In most states you disclaim by filing a written instrument with the trustee
  • If a valid disclaimer is made, the trust is read as though the person who disclaimed was dead on the relevant date
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14
Q

Are class gifts permissible?

A

Class gifts are permissible if the class is reasonably definite- the trustee can determine who belongs to the class

(Gift to “my children” ok, gift to “my friends” not)

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15
Q

What purposes will make a trust invalid?

A
  • Illegality
  • Contrary to public policy
  • Impossible to achieve
  • Intended to defraud the settlor’s creditors or based on illegal consideration
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16
Q

What happens if a trust has a condition attached to an interest that is against public policy?

A
  • The settlor’s alternative desires control if they were expressed
  • If the illegal condition is a condition subsequent, the condition is invalidated but the trust remains valid
  • If the illegal condition is a condition precedent, the preferred view is to hold that the settlor’s wish would be to void the beneficiary’s interest altogether if the condition is unenforceable
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17
Q

How does a person accept trusteeship?

A
  • Signing the trust or a separate written acceptance
  • Substantially complying with the acceptance terms in the trust instrument OR
  • Accepting delivery of trust property, exercising powers or performing duties as trustee, or indicating acceptance
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18
Q

What are the grounds for removing a trustee?

A
  • A serious breach of trust
  • Serious lack of cooperation
  • Unfitness, unwillingness, or persistent failure to administer
  • A substantial change in circumstances
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19
Q

Is a writing required for a trust of land?

A

Yes- Statute of Frauds applies

But if no writing, an otherwise invalid oral trust of land may be enforced by imposing a constructive trust

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20
Q

Can pour-over property be initial trust funding?

A

Yes, if

  • The trust is identified in the will AND
  • The trust is executed before the testator’s death
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21
Q

Define secret trust

A

The settlor agrees with a will beneficiary that the beneficiary will hold the property in trust for someone else - and relies on the beneficiary’s promise - but the will does not state the trust nature of the gift

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22
Q

What standard is required to prove the existence of a secret trust?

A

Clear and convincing evidence

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23
Q

What is a semi-secret trust?

A

The will makes a gift in trust but fails to name the beneficiary. The gift fails and the named trustee holds the property in a resulting trust for the testator’s successors in interest

24
Q

Can you transfer your interest in a trust?

A

Yes, as long as there are not restrictions in statutes or in the trust instrument

25
Q

What is a discretionary trust?

A

The trustee is given discretion whether to apply or withhold payments of income or principal (or both) to the beneficiary

26
Q

What is a spendthrift trust?

A

It precludes the beneficiary from voluntarily or involuntarily transferring their interest in the trust, and the beneficiary’s creditors are precluded from reaching it to satisfy their claims

27
Q

Can a settlor use a spendthrift trust to protect their own assets?

A

In most states no, but a growing number of states are allowing self-settled spendthrift trusts called domestic asset protection trusts (DAPT)

28
Q

Are support trusts assignable?

A

No

29
Q

If a support trust is silent, what standard of living should be provided for the beneficary?

A

The beneficiary’s accustomed standard of living

30
Q

How can the beneficiaries revoke a trust if they have the settlor’s consent?

A

ALL beneficiaries and the settlor must consent

31
Q

How can the beneficiaries revoke a trust without the settlor’s consent?

A

If ALL beneficiaries consent (including future and un-ascertained beneficiaries) AND no material purpose of the trust would be frustrated

32
Q

When can the court terminate a trust?

A
  • If the trust could have been terminated with the consent of all of the beneficiaries and the interests of any non-consenting beneficiaries will be adequately protected
  • Unanticipated circumstances threaten the purpose of the trust
  • Continuation of the trust on its existing terms if impracticable or wasteful
  • The value of the trust is insufficient to justify the cost of administration or to achieve the settlor’s tax objectives
33
Q

What is the amount under which some states will deem a trust uneconomic?

A

$50k

34
Q

If co-trustees cannot reach a unanimous decision, what standard is required for action?

A

In most states, they can act by majority agreement

35
Q

What are the trustee’s duties?

A
  • Duty to administer trust
  • Duty of loyalty
  • Duty to report
36
Q

What does a trustee’s duty to report include?

A
  • Given qualified beneficiaries their name, address, and phone number
  • Respond to beneficiary requests for information about the trust’s administration and provide a copy of the trust instrument if requested
  • Furnish an annual accounting of the trust
37
Q

What act governs the trustee’s investment responsibilities?

A

The Uniform Prudent Investor Act

38
Q

Under UPIA, what is the standard of care the trustee must exercise in investments?

A

The trustee must exercise reasonable care, skill, and caution when investing and managing trust assets

39
Q

Are trust investments evaluated individually or overall?

A

Overall

40
Q

Are trustee’s with special skills/experience held to a higher standard of care?

A

Yes

41
Q

Is socially conscious investing permissible?

A

Only if the returns are the same as investing “traditionally” (in big oil etc)

42
Q

Can the trustee delegate the investment and management functions?

A

Yes, if they act prudently in doing so and periodically review the agent’s actions

43
Q

Who is the trustee liable to?

A

The beneficiary

44
Q

What is the trustee’s liability for breach of trust?

A

Whichever is greater of these options

  • The amount necessary to restore the trust property and distributions to what they would have been absent the breach
  • The trustee’s profits from the breach
45
Q

What are the beneficiary’s options if the trustee engages in self-dealing?

A
  • Affirm the transaction (if the trust profited)
  • Set aside the transaction (if the trust lost money)
  • Trace profits from the trustee (if the trustee profited)
46
Q

When are exculpatory clauses void?

A

If they

  • Relieve the trustee of liability for breach of trust committed in bad faith or with reckless indifference OR
  • Appear in the trust instrument because of the trustee’s abuse of a confidential relationship with the settlor
47
Q

When can a court remove a trustee?

A
  • Request of beneficiary
  • Request of settlor
  • Request of a co-trustee
  • Of the court’s own volition
48
Q

Can you sue the trust?

A

No- it isn’t a legal entity. You can sue the trustee in their fiduciary capacity though

49
Q

What are income receipts

A
  • Ordinary receipts from use or investment of trust property (rents, interest)
  • Cash dividends
  • Proceeds from contract insuring trustee against loss
  • 10% of payment from a deferred compensation plan (pension plan) unless otherwise characterized
  • 10% of proceeds received from a liquidating asset (ex patents, copyrights)
  • 10% of proceeds received from a working interest (ex oil and gas interests)
50
Q

What are income expenses?

A
  • 50% of regular compensation of the trustee and any person providing investment services
  • 50% of all expenses for accountings, judicial proceedings, and other matters affecting income and remainder interests
  • Ordinary expenses
  • Insurance premiums covering loss of a principal asset
51
Q

What are principal receipts?

A
  • Extraordinary receipts (ex proceeds from sale of trust assets)
  • Stock dividends
  • Proceeds from life insurance policy naming trust or trustee as beneficiary
  • 90% of payment from a deferred compensation plan (ex pension plan) unless otherwise characterized
  • 90% of proceeds received from a liquidating asset (patents, copyrights)
52
Q

What are principal expenses?

A
  • 50% of all regular compensation of the trustee and any person providing investment services
  • 50% of all expenses for accountings, judicial proceedings, and other matters affecting income and remainder interests
  • Expenses of a proceeding that concerns a principal interest
  • Payments on the principal of a trust debt
  • Estate taxes
  • Disbursements related to environmental matters
53
Q

What is distinct about a charitable trust?

A
  • It must have indefinite beneficiaries
  • It may be perpetual- rule against perpetuities does not apply
  • Cy pres applies
54
Q

Cy pres

A

Means as near as possible.

If a charitable trust’s purpose cannot be carried out as written, the court may select an alternative under the doctrine of cy pres by ascertaining the settlor’s original purpose

55
Q

What is a resulting trust?

A

A trust that arises from implication of the settlor’s conduct

56
Q

When does a resulting trust arise?

A

The settlor has conveyed property to a trustee under an express trust and

  • The trust is void or unenforceable OR
  • The beneficiary is dead or cannot be located

A resulting trust also arises in favor of the settlor when the trust purpose is fully satisfied and some trust property remains

57
Q

What is a constructive trust?

A

Not really a trust, but a flexible equitable remedy to prevent unjust enrichment resulting from wrongful conduct

MEE Subjects (8 decks)

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