Trusts

Question 1

trust (general definition)

Answer 1

A trust is a fiduciary relationship in which a trustee holds legal title to specific property under a fiduciary duty to manage, invest, safeguard, and administer the trust assets and income for the benefit of designated beneficiaries, who hold equitable title.

Question 2

trustee

Answer 2

the trustee has the responsibility of ownership; he receives no benefit from his holding of legal title

a trustee is a fiduciary and thus (1) must deal with the property with reasonable care; (2) must maintain the utmost degree of loyalty; and (3) is personally responsible if their conduct falls beneath required standards

most trusts will not fail because the trustee dies, refuses to accept appointment, or resigns

Question 3

beneficiary

Answer 3

the equitable or beneficial interest is held by the beneficiary who receives the benefits of ownership as set forth in the trust

the beneficiary usually has little or no control over the trust or the trust property

the beneficiary is the person who enforces the trust and the person the trustee owes duties toward

an ascertainable beneficiary is necessary to the validity of EVERY trust EXCEPT charitable and honorary trusts

not everyone who benefits from a trust is considered to be a beneficiary; the trust must operate DIRECTLY to benefit the person

Question 4

settlor

Answer 4

the settlor is the person who causes the trust to come into existence by supplying the initial trust property

Question 5

trust validity

Answer 5

The FIRST STEP in any trust question is to ascertain whether the trust is valid.

There are 5 main elements:

(1) intent (must be that the trust take effect immediately)
(2) identifiable corpus
(3) ascertainable beneficiaries
(4) proper purpose
(5) mechanics and formalities

Question 6

precatory language

Answer 6

expression of hope, wish, or mere suggestion that the property be used in a certain way

does not create a trust

Question 7

trust intent

Answer 7

the settlor splits legal and equitable title and imposes enforceable duties on the holder of legal title

Question 8

split of title

Answer 8

any split of title is sufficient SO LONG AS the sole trustee is not the sole beneficiary

if the sole trustee and sole beneficiary are the same individual, the equitable and legal titles MERGE and the trust terminates

Question 9

identifiable corpus

Answer 9

any property you can transfer; the property in a trust must be ascertainable with certainty

a future interest may be held in trust, but an interest not yet in legal existence cannot be held in trust

examples include real or personal property, tangible or intangible property, vested or CONTINGENT interests, and contract rights such as the right to be a beneficiary of a life insurance policy

Question 10

qualified beneficiary

Answer 10

a qualified beneficiary is a beneficiary who, on the date the beneficiary’s qualification is determined, is (1) a current beneficiary or (2) a first-line remainderman

qualified beneficiaries may have additional rights compared to remote beneficiaries

Question 11

first-line remainderman

Answer 11

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

Question 12

time for making a disclaimer

Answer 12

many state disclaimer statutes require that a disclaimer be made within nine months of the interest’s creation

this does not apply to a beneficiary under the age of 21

Question 13

if a trust fails for lack of a beneficiary…

Answer 13

a resulting trust in favor of the settlor or their successors is presumed

Question 14

acceptance of trusteeship

Answer 14

A person accepts a trusteeship by (1) signing the trust or some other document; or (20 substantially complying with the instrument; or (3) accepting delivery of trust property

Question 15

removal of a trustee

Answer 15

a court can remove a trustee on its own motion or upon request by the settlor, a beneficiary, or a co-trustee

grounds for removal include: (1) serious breach of trust; (2) serious lack of cooperation among co-trustees; (3) unfitness, unwillingness, or persistent failure to administer; or (4) a substantial change in circumstances

Question 16

declaration of trust

Answer 16

a person declares himself trustee of specific property for a beneficiary

the settlor and trustee are the same person

you must convey your land to yourself as trustee (otherwise it’s invalid)

Question 17

transfer or conveyance of trust

Answer 17

the settlor creates the trust by transferring legal title of the property to the trustee

the settlor may retain or transfer the EQUITABLE title, but the settlor conveys legal title

settlor and trustee are not the same person

if the trust was created by conveyance in trust, the settlor must convey the property to the trustee; real property is conveyed by deed; personal property is conveyed by physical delivery or an appropriate written assignment

delivery means placing the trust property out of the settlor’s control

Question 18

statute of frauds in trusts—writing

Answer 18

a writing is required for trusts of land

most states do not require a writing for a trust of personal property

for a trust of land, a written instrument signed by the person entitled to impress the trust upon the property is required under the Statute of Frauds—note that an oral trust of land may be enforced by imposing a constructive trust

Question 19

effect of part performance on the statute of frauds defense

Answer 19

if the holder of legal title acts as if they are a trustee, part performance will preclude the statute of frauds defense

Question 20

secret trusts

Answer 20

in the case of a secret trust, 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 in the gift

a constructive trust will be imposed on the property in favor of the intended trust beneficiary

Question 21

semi-secret trust

Answer 21

in a semi-secret trust, the will makes a gift in trust but fails to name the beneficiary

the gift fails, and the named trustee holds the property on a resulting trust for the testator’s successors in interest

extrinsic evidence is not allowed

Question 22

pour-over property as initial trust funding

Answer 22

the trust may remain unfunded during the settlor’s lifetime

the pour-over property can be the initial trust funding if: (1) the trust is identified in the will and (2) the trust is executed before the testator’s death

Question 23

T/F: To be a valid pour-over trust, the trust instrument must be executed before or concurrently with the will.

Answer 23

FALSE:
The instrument must be executed before the testator dies but doesn’t have to be executed before or at the time of the will execution.

Question 24

`discretionary trust

Answer 24

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

Question 25

creditors’ rights under a discretionary trust

Answer 25

before the trustee exercises their discretion to make payments to the beneficiary, the beneficiary’s interest is NOT ASSIGNABLE and cannot be reached by their creditors

Question 26

beneficiary’s rights under a discretionary trust

Answer 26

the beneficiary has no right to payment that they can enforce against the trustee

Question 27

spendthrift trusts

Answer 27

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

Question 28

self-settled spendthrift trusts // the “domestic asset protection trust”

Answer 28

in most states, a settlor cannot use a spendthrift trust to protect their own property from their own creditors; but a growing number of states allow this

Question 29

support trusts

Answer 29

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

Question 30

standard of support

Answer 30

if the instrument is silent, the standard of support is the beneficiary’s accustomed standard of living

Question 31

creditors of trustee

Answer 31

the creditors of the trustee cannot reach trust property to satisfy their claims; they have only a personal claim against the trustee

Question 32

termination/modification of the trust by the settlor

Answer 32

under the UTC, a settlor can revoke or amend a trust UNLESS the terms expressly state that it is irrevocable

the traditional rule provides that a trust is irrevocable unless the settlor expressly reserves the power to revoke or modify the trust

Question 33

claflin rule

Answer 33

a trust may be terminated or modified on the consent of ONLY ALL beneficiaries (that is, without the consent of the settlor) but only if NO MATERIAL PURPOSE of the trust would thereby be frustrated

Question 34

examples of provisions that might constitute frustration of material purpose

Answer 34

support of beneficiary

spendthrift provision

payment at certain ages

payment at certain dates

discretionary trust

Question 35

virtual representation

Answer 35

allows current bennys who are in a similar situation without a conflict of interest to represent unborn/remote beneficiaries to make various decisions with regard to the trust

Question 36

termination by the court

Answer 36

a court may terminate or modify the trust if (1) the trust could have been modified if all beneficiaries had consented and (2) the interests of any nonconsenting beneficiaries will be adequately protected

additionally, the court may terminate or modify a trust if…

• unanticipated circumstances threaten the purposes of the trust;
• continuation of the trust on its existing terms is impracticable or wasteful; or
• the value of the trust is insufficient to justify the cost of administration or to achieve the settlor’s tax objectives

Question 37

termination by the trustee (uneconomic trust)

Answer 37

in some states, a trustee can terminate a trust if the trust property is less than $50,000 and the amount is insufficient to justify the cost of administration, as long as the trustee provides the qualified beneficiaries with notice

Question 38

multiple trustees must exercise their trust powers…

Answer 38

by majority

Question 39

prudent investor rule

Answer 39

the trustee must invest in the same manner as a prudent investor (unless the trust instrument provides for some other standard)

Question 40

portfolio approach

Answer 40

the investor’s prudence is evaluated as to the OVERALL investment strategy

some speculation may be appropriate or even required

Question 41

settlor directing the trustee to make nondiverse investments in a REVOCABLE trust

Answer 41

because the trustee of a revocable trust owes their duties to the settlor in many states, such a directive may relieve the trustee of their duty to diversify

Question 42

trustees with special skills or experience

Answer 42

trustees with special skills or expertise, or who have represented themselves as having such knowledge, have a duty to use such skills or expertise

a professional trustee or attorney may be held to a higher standard

Question 43

delegation

Answer 43

the trustee must act prudently in (1) selecting the agent; (2) establishing the scope and terms of the delegation; and (3) periodically reviewing what the agent has done.

Question 44

liability of trustee: remedies for breach of trust

Answer 44

if the trustee commits, or is about to commit, a breach of trust duties, the court may (1) enforce specific performance of the trustee’s duties; (2) enjoin the trustee from committing a breach of trust; (3) compel the trustee to pay money or restore property; or (4) suspend or remove the trustee

Question 45

liability of trustee: damages to beneficiaries

Answer 45

if a trustee commits a breach of trust, the trustee is liable to the beneficiaries for the GREATER of (1) the amount necessary to restore the trust property and distributions to what they would have been absent the breach or (2) the trustee’s profit from the breach

Note that a trustee is liable to the beneficiary for any profit arising from the administration of the trust, even if there was no breach

Question 46

liability of co-trustees

Answer 46

generally, a trustee will not be liable for the acts of co-trustees if the trustee did not join in the action AND exercised reasonable care in preventing the breach of trust or compelling the co-trustee to redress the breach

Question 47

remedies for self-dealing

Answer 47

in a case of self-dealing, the beneficiary may have a choice among the following:

• 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

Question 48

inapplicability of respondeat superior

Answer 48

trustees are not liable for the torts of their agents

Question 49

adjustment power

Answer 49

if the trust calls for distribution of trust income to a beneficiary, the trustee must follow traditional trust accounting rules by distributing interest and dividend income, etc., to the beneficiary

if the trustee determines that by distributing only the trust’s income the trustee is unable to comply with the requirement that all beneficiaries be treated fairly, the trustee may ADJUST between principal and income to the extent necessary

must consider all the circumstances before exercising this power

Question 50

principal

Answer 50

if you sell an asset of the trust, all money received are principal

principal includes the return of the investment (the amount you paid for it) PLUS the appreciation

all property other than money received from an entity (for example, cash dividends) is characterized as principal—stock dividends are principal

Question 51

deferred compensation, liquidating assets like patents, and mineral interests—10% rule

Answer 51

if not part of a periodic payment from a deferred compensation plan is characterized as income or as a dividend, 10% of the payment is characterized as income and the balance is principal

Question 52

doctrine of cy pres

Answer 52

when the trustee cannot carry out the trust as written, such as when the charitable purpose selected by the settlor is impracticable, unlawful, impossible to achieve, or wasteful, the court may select and alternative under this doctrine, which means “as near as possible,” by ascertaining the settlor’s primary purpose

Question 53

rule against perpetuities and charitable trusts

Answer 53

charitable trusts are NOT bound by the RAP, and thus may be perpetual

RAP does apply to shifts between private and charitable causes

Question 54

enforcing charitable trusts

Answer 54

suit can be brought by the settlor, a qualified beneficiary, or the state’s attorney general

Question 55

two types of trusts that arise by operation of law

Answer 55

(1) resulting trusts

(2) constructive trusts

Question 56

resulting trusts

Answer 56

Resulting trusts arise by implication from the settlor’s conduct.

They are of three types: (1) purchase money resulting trusts; (2) resulting trusts arising on failure of an express trust; and (3) resulting trusts arising from an incomplete disposition of trust assets (that is, excess corpus)

Question 57

beneficiaries of a resulting trust

Answer 57

the settlor is the benny of a resulting trust

if the settlor is deceased, the settlor’s successors in interest are the bennys

Question 58

two circumstances giving rise to resulting trust

Answer 58

a resulting trust arises where a settlor has conveyed property to a trustee under an express trust and (1) the trust is VOID or UNENFORCEABLE, or (2) the beneficiary is DEAD or CANNOT BE LOCATED

Question 59

purchase money resulting trusts

Answer 59

a purchase money resulting trust is PRESUMED whenever X (the beneficiary) furnishes the consideration (usually money) for the acquisition of real or personal property but, with X’s consent, title is taken in the name of Y (the “trustee”)

consideration must be for the PURCHASE of property—not for its improvement or to pay taxes

and the consideration must be supplied at or before the time Y takes title

Question 60

exceptions to the purchase money resulting trust

Answer 60

where there is a close personal relationship between the parties (e.g., X, the party paying consideration, is the parent/grandparent/spouse of Y, the taker of legal title), a GIFT is presumed—but not when the person furnishing is the AUNT/UNCLE, BROTHER/SISTER, CHILD, OR GRANDCHILD

if X and Y take title for an illegal purpose, a trust cannot be implied

no resulting trust arises when the transferee obtained title wrongfully

Question 61

constructive trust

Answer 61

this is not really a trust but rather is a flexible equitable remedy to prevent UNJUST ENRICHMENT resulting from wrongful conduct, such as fraud, undue influence, or breach of fiduciary duty

equity turns the holder of legal title into a trustee when they may not in good conscience retain the beneficial interest of the property

the constructive trustee’s only duty is to CONVEY the property to the person who would have owned it but for the wrongful conduct

Question 62

standard of proof for constructive trusts

Answer 62

clear and convincing evidence