Trusts Flashcards
Support Trusts
In a support trust, the trustee is required to apply so much of the trust as is necessary for the beneficiary’s support. The trustee does not have discretion to refuse to pay those bills. Trustee is obligated to pay X for support up to the total amount of the income of the trust.
Discretionary Trusts
In a discretionary trust, the trustee is given discretion whether to apply or withhold payment of trust property to the beneficiary.
The beneficiary cannot interfere with the exercise of the trustee’s discretion unless the trustee abuses her power.
Generally, a court will not interfere unless the trustee has acted in bad faith or dishonestly. Although a court is more likely to interfere when the discretionary trust is a support trust, if a trustee is given absolute discretion, court interference is unlikely.
Trustee’s fiduciary duties include
a duty to preserve trust property and make it productive;
a duty to make sure the trust produces income for B’s support (if support trust);
a duty of loyalty to remaindermen
Termination/Revocation of a Trust
Most jurisdictions permit termination of a trust by its Bs only if all of the Bs consent and the modification will not interfere with a material purpose of the trust. Although permitted by the UTC, most states do NOT permit a guardian to consent to the termination of a trust on behalf of unborn Bs.
A court can terminate a trust prior to the time fixed in the instrument if the trust purposes are accomplished early or the trust purposes become illegal or impossible to carry out.
Presence of a spendthrift provision likely precludes
The presence of a spendthrift provision likely precludes termination of a trust bc it shows the settlor’s material purpose and manifests his lack of confidence in the judgment and management ability of the B. But if the settler were to join in the request for termination, the material purpose would be waived.
Court modification of a trust
Rather than seeking termination/revocation, a party with standing may seek court relief to direct trustee to deviate from the trust’s terms bc of changed circumstances.
Although a court generally cannot change beneficial rights, a court may strain to find an implied power of invasion of the corpus in the trust instrument, particularly if it can find that support of the income B was the primary purpose of the trust.
To create a valid trusts, there must be:
(1) an ascertainable beneficiary (reasonably identifiable now or in the future);
(2) a settlor with capacity;
(3) an intent to create a trust;
(4) a trustee;
(5) a valid trust purpose;
(6) trust property (the res); and
(7) compliance with any State formalities (UTC does not require any execution formalities).
Trust Formation - Funding the Trust
A trust is NOT created until it receives valid property. Although an unfunded, executed trust instrument would not validly create a trust at the time of execution, it can succeed in establishing the trust once the trust is funded (assuming it meets all the other formation requirements).
If the settlor makes a gratuitous promise to create a trust in the future (e.g. the trust is not funded/has no assets when the trust instrument is executed), a trust arises in the future only if: (i) the promise is supported by valid consideration; or (ii) he re-manifests an intention to create the trust when the trust is funded/assets come into existence.
Spendthrift Provisions
A spendthrift trust is one in which the beneficiary cannot voluntarily or involuntarily transfer her interest in the trust. The B cannot sell or assign her rights to future income or capital, and her creditors generally are unable to collect or attach such rights.
However, an exception is made when the settlor is a beneficiary of the trust and attempts to protect his own retained interests from his creditors by the inclusion of a spendthrift provision. In that event, the settlor-beneficiary’s creditors can reach his right to the income just as if the spendthrift restriction did not exist.
Pour-Over Provisions/Gifts
Under the traditional view, a pour over gift from a will to an inter vivos trust was invalid if the trust was established after execution of the will.
But under the prevailing view, the trust may be established after the will is executed but before the testator’s death [a will may devise property to a trustee of a trust established or to be established during the testator’s lifetime].
Pour-over gifts are valid even if the trust is unfunded or amended during the testator’s lifetime.
Revocability/amendability of trusts by settlor
Under the UTC, a settlor can revoke or amend a trust unless the terms expressly state that it is irrevocable. However, many states still follow the CL rule, which requires that the settlor reserve the power to revoke and amend. In those states, a trust is irrevocable unless the instrument expressly states otherwise.
Powers of appointment
A power of appointment is an authority created in a donee enabling the donee to designate, within the limits prescribed by the donor of the power, the persons who shall take certain property in the manner in which they shall take it. A general power of appointment is exercisable in favor of the donee, her estate, her creditors, or the creditors of her estate. A special appointment is exercisable in favor of a specified class of persons that does not include the donee, her estate, creditors, or the creditors of her estate. A presently exercisable power is exercisable by the donee during her lifetime. A testamentary power is one that is exercisable only by the donee’s will.
Issue: How the settlor can ensure that the share of any deceased child passes to the child’s issue
Where a remainder interest is conditioned on a beneficiary surviving the settlor and the beneficiary does not meet the condition, his interest fails. Nearly all states have anti last statutes that operate to save a gift to a predeceasing beneficiary of the beneficiary was in a specified degree of relationship to the testator and the left surviving descendants. Several states and the UPC apply the anti lapse statute to future interest created in trust (even to those conditioned on survival), but in most states the anti lapse statute applies only to testamentary gifts.
If desirable, the trust instrument should expressly provide that issue of deceased children take their parents to share.
Beneficiaries (rules r/t formation of valid trust)
Although a B need not be identified at the time a trust is created, they must be susceptible to ID by the time their interests are to come into enjoyment. The trust Bs may be a class as long as the class is sufficiently definite. Settlor can even allow the trustee, in its discretion, to select the members as long as the class is reasonably definite.
If the class is too broad, the trust (or a portion of it) may be invalid for lack of definite beneficiaries. For example, an income portion may fail. When a portion of a trust fails for lack of a B, a resulting trust in favor of the settlor or the settlor’s successors in interest is presumed.
Example: if the income portion of the trust fails, give the income to the residuary beneficiary under the residual clause of the will (rather than giving it to the remainder Bs who get the remaining principal of the trust).
Issue: does a remainder B’s judgment creditor have a right to an immediate payment from the trust?
Except as otherwise provided by statute or as validly restricted by the terms of the trust instrument (e.g. by a spendthrift provision), the interest of an insolvent trust beneficiary can generally be reached in appropriate proceedings to satisfy the claims of his creditors. However, the creditor reaches only the interest of the beneficiary and not the trust property itself.
If the trust does not contain a spendthrift provision, a claimant may reach a remainder beneficiary’s interest in the trust principal. However, the remainder beneficiary is not entitled to any trust principal until the trust terminates. Upon the trust’s termination, if the judgment remains outstanding, trustee may be required to pay the money directly to the creditor rather than the remainder B.
