Trusts

Question 1

Trust

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.

–A trust can be created by inter vivos transfer, by inter vivos declaration of trust, or by will.

Question 2

Trustee

Answer 2

A trustee holds legal interest. The trustee manages and invests the property in accordance w/ legal duties and the settlor’s instructions as contained in the trust instrument. The trustee makes payments to or for the benefit of the beneficiary following the settlor’s instructions in the trust instrument. When the trustee’s duties are completed, the trust terminates and the trustee distributes any remaining property to the remainder beneficiaries.

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

–The settlor must intend to impose enforceable duties on the trustee. If duties aren’t spelled out, the court will usually imply duties if there is an intention to create a trust, a res, and an identified beneficiary.

–Anyone who has the capacity to acquire and manage property for their own benefit and has the capacity to administer that property may be a trustee.

-A trustee is entitled to reasonable compensation or to whatever compensation is specified in the trust instrument. Trustee is entitled to reimbursement for expenses incurred.

Question 3

Express Trusts

Answer 3

Express trusts are created by the express intention of the settlor. They fall into two categories distinguished primarily by the identity of their beneficiaries:

• Private: private beneficiaries (certain ascertainable persons)
• Charitable: charitable beneficiaries (indefinite class of persons or the public in general)

These are governed by the Uniform Trust Code (UTC) (adopted by almost all states).

Question 4

Resulting Trusts

Answer 4

Resulting trusts arise from the presumed intention of the owner of the property.

Question 5

Constructive Trusts

Answer 5

Constructive trusts are an equitable remedy used to prevent unjust enrichment.

Question 6

Split of Title

Answer 6

Any split of title is sufficient so long as the sole trustee is not the sole beneficiary.

Question 7

Elements for an Express Trust

Answer 7

There are six elements required for an express trust:

(1) A settlor with capacity to convey;
(2) A present intent to create a trust relationship (manifested by settlor’s words, writing, or conduct);
(3) A competent trustee with duties (inter vivos trust only; a testamentary trust will not fail for lack of a trustee);
(4) A definite beneficiary(ies) [Note: Same person cannot be sole trustee and sole beneficiary];
(5) Trust property (res) [this may 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];
(6) Valid trust purpose (one that is not illegal, against public policy, or impossible to achieve, and does not violate RAP)

Question 8

Trust Intent

Answer 8

The settlor’s intention to create a trust is essential to the existence of an express trust. The settlor must intend to split the legal and equitable title and to impose enforceable duties on the holder of the legal title.

Question 9

Insufficient Trust Property

Answer 9

Property the settlor cannot transfer or does not yet own cannot be trust property. An unenforceable gratuitous promise cannot be the subject of a trust.

–Examples: The property of another person, expected future income or profits not supported by a valid contract, and an expectancy to inherit (or take under a will) from a person who is still alive.

Question 10

Sufficient Trust Property

Answer 10

The trust property must be an existing interest in existing property.

–A future interest may be held in trust, but an interest not yet in legal existence (that is, a mere expectancy such as the right to inherit from a person who is still alive) cannot be held in trust.

–Future profits from an existing contract can be trust res.

–The trust res must be existing property that the settlor has the power to convey, including intangibles (for example, promissory notes) in which the settlor has an assignable interest.

Question 11

Qualified Beneficiary

Answer 11

Is a beneficiary who, on the date the beneficiary’s qualification is determined, is: (1) a current beneficiary, or (2) a first-line remainderman (that is, one who would become eligible to receive distributions were the event triggering the termination of the beneficiary’s interest or of the trust itself to occur on the qualification date).

Question 12

Disclaimer of a Trust

Answer 12

Under the law of most states, a beneficiary may disclaim an interest by filing a written instrument with the trustee (or, if created by will, with the probate court). If a valid disclaimer is made, the trust is read as though the disclaimant was deceased as of the relevant date.

–Many states require that a disclaimer be made within 9 months of the interest’s creation, and that is the relevant period for federal gift tax purposes. (some states have no time limit as long as the beneficiary is not estopped from doing so)

–The time limit doesn’t apply to a beneficiary who is under the age 21. A disclaimer is timely if made within 9 months after the beneficiary attains age 21.

–Beneficiary may be estopped from making a disclaimer if they’ve exercised any dominion or control over the interest or accepted any benefits under the trust.

–Under most state disclaimer statutes, a disclaimer relates back to the date of the transfer for all purposes. Thus, a disclaimer by an insolvent beneficiary can be used to defeat creditors’ claims but not a federal tax lien.

Question 13

Anti-Lapse Statutes and Trusts

Answer 13

Many states and the UPC apply the anti-lapse statute to future interests created in trusts - even to future interests expressly made contingent on survival - unless the trust makes an alternate gift in case of a beneficiary’s nonsurvival.

Question 14

Divorce and Trusts

Answer 14

A final decree of divorce or annulment revokes all beneficial gifts and fiduciary appointments in favor of a former spouse.

The UPC and several states have extended the “divorce revokes” rule to beneficiary designations of individuals who are related to the former spouse but not the settlor. The governing instrument is read as though the former spouse (and their relatives) is deceased.

Question 15

Definiteness of Beneficiaries

Answer 15

There must be definite beneficiaries to have a private trust (not required in a charitable trust).

–Beneficiaries may be “definite” even though not yet ascertainable (e.g., unborn children). Beneficiaries must be ascertainable by the time their interests are to come into enjoyment.

–Beneficiaries may be designated by generic descriptions such as “children.” Beneficiaries may be unascertainable when the trust is created, so long as they will be ascertainable when they are to benefit. (e.g., “to my children and upon their death, to my then surviving grandkids.”) The trustee must be able to determine who belongs to the class.

-Common law requires the class to be “reasonably definite” in a private trust.

–Under the UTC, a settlor may empower the trustee to select the beneficiaries from an indefinite class. Failure to exercise the power gives rise to a resulting trust in favor of the settlor or their successors.

Question 16

Resulting Trust Remedy

Answer 16

If a trust fails for lack of a beneficiary (e.g., not ascertainable) a resulting trust in favor of the settlor or their successors is presumed.

Question 17

Trust Purpose

Answer 17

The general rule is that a settlor may create a trust for any purpose. However, a trust purpose is invalid if:

• Illegal
• Contrary to public policy
• Impossible to achieve
• Intended to defraud the settlor’s creditors or based on illegal consideration

Question 18

Trust Purpose: Acts Contrary to Public Policy

Answer 18

Public policy is violated if the purpose of the trust is to: (1) induce others to engage in criminal or tortious acts; (2) encourage immorality; or (3) induce a person to neglect parental, familial, or civic duties.

If a condition is attached to an interest that is against public policy:

• The settlor’s alternative desire controls if expressed
• If the illegal condition is a condition subsequent, the condition is invalidated but the trust is valid.
• If the illegal condition is a condition precedent, the preferred view is to hold the interest valid (vested) unless there is evidence that the settlor’s wish would be to void the beneficiary’s interest altogether if the condition is unenforceable.

Question 19

Acceptance of Trusteeship

Answer 19

A person accepts a trusteeship by: (1) signing the trust or a separate written acceptance; (2) substantially complying with the acceptance terms in the trust instrument; or (3) accepting delivery of trust property, exercising powers or performing duties as trustee, or indicating acceptance.

–However, the person designated as trustee may still preserve the trust property w/o accepting the trusteeship, provided they send notice of rejection to the settlor or a qualified beneficiary.

–If the trusteeship is not accepted within a reasonable time, it is presumed to be rejected.

–A testamentary trust is treated as in existence as of the settlor’s death, and the trustee’s acceptance “relates back” to that date. Thus, it’s possible for a trustee, by accepting, to become liable (in their fiduciary capacity) on tort claims arising prior to the time the trustee accepted.

Question 20

Removal of a Trustee

Answer 20

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) a 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 the circumstances.

–The basic factor to consider is whether continuation in office would be detrimental to the trust.

Question 21

Trustee Resignation

Answer 21

Under the UTC, the trustee can resign by either: (1) giving 30 days’ notice to the qualified beneficiaries, settlor (if living), and co-trustees; or (2) obtaining court approval.

Question 22

Inter Vivos Trusts

Answer 22

Inter vivos trusts are created while the settlor is alive either by the settlor declaring themself trustee for another or by the transfer of property to another as trustee. The present intent requirement must be manifested by conduct (delivery) or words (declaring oneself trustee).

–If a present trust is not established b/c there is no trust res, the trust arises when the settlor subsequently acquires the res and re-manifests trust intent.

–When settlor is NOT trustee: The settlor creates the trust by transferring legal title of the property to a trustee. The settlor may retain or transfer the equitable title, but the settlor conveys legal title.

Question 23

Transfer (Delivery) of Property to Trustee: Declaration of Trust

Answer 23

If a trust was created by a declaration of trust, no conveyance of personal property is needed as long as the property is identified and segregated. Real property should be conveyed from the settlor as an individual to the settlor as a trustee.

–For declarations of trusts, the settlor + trustee are the same person

Question 24

Transfer (Delivery) of Property to Trustee: Conveyance in Trust

Answer 24

If the trust was created by a 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 25

Trusts Formal Requirements - Statute of Frauds

Answer 25

Most states do not require a writing for a trust of personal property. Oral trusts may be established by clear and convincing evidence.

For a trust of land, however, a written instrument signed by the person entitled to impress the trust upon the property is commonly required under the Statute of Frauds.

–Note that an otherwise invalid oral trust of land may be enforced by imposing a constructive trust.

–If the holder of the legal title acts as if they are a trustee, part performance will preclude the Statute of Frauds defense. (the Statute of Frauds is to protect the donee of a gift from false claims that the donee is really a trustee)

–Most states allow extrinsic evidence where an ambiguity appears on the face of the writing.

Question 26

Pour-Over Trusts

Answer 26

A settlor can make gifts by will to a trust established during their lifetime. The trust must be clearly identified from the language in the will.

The trust may remain unfunded during the settlor’s lifetime. The pour-over property can be the initial trust funding if:

• The trust is identifiable in the will, and
• The trust is executed before the testator’s death

Property goes into the trust as the trust exists at the date of the testator’s death.

Question 27

Testamentary Trusts

Answer 27

Testamentary trusts are created in the settlor’s valid will. Trust intent and the essential terms of the trust (trust res, beneficiaries, and trust purpose) must be ascertained from the will itself, from a writing incorporated by reference into the will, or from the exercise of a power of appointment created by the will.

Question 28

Secret Trust

Answer 28

The settlor agrees to make an absolute gift in a will made in reliance of the beneficiary’s promise to hold the property in trust for another person.

E.g., Poppy agrees to gift all of his money in his will to Dad, relying on Dad’s promise to hold the money in trust for Aunt Gina.

–The intended trust beneficiary (Aunt Gina) may present extrinsic evidence of the will beneficiary’s promise to hold the property in trust. If the promise can be proven by clear and convincing evidence, a constructive trust will be imposed on the property in favor of the intended trust beneficiary.

Question 29

Semi-Secret Trust

Answer 29

The will makes a gift in trust but fails to name who the trust beneficiary is or how the property is to be used.

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

–No extrinsic evidence allowed.

Question 30

Discretionary Trusts

Answer 30

In a discretionary trust, the trustee is given discretion whether to apply or withhold payments of income or principal (or both) to a beneficiary.

–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. (beneficiary has nothing to transfer and no interest for creditors to reach - the beneficiary has a mere expectancy to be a beneficiary)

–Exception: The court can enforce the trustee to satisfy a judgment or order against the beneficiary for the support or maintenance of the beneficiary’s child, spouse, or former spouse.

–Creditors are usually allowed to attach the beneficiary’s interest but may not compel the trustee to make a distribution. If the trustee has notice of an attachment by creditors and decides to make payments to the beneficiary, the trustee must make those payments directly to the creditors UNLESS the beneficiary’s interest is protected by a spendthrift provision.

Question 31

Spendthrift Provision

Answer 31

A spendthrift trust 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. The purpose is to protect the beneficiary from their own improvidence.

–The beneficiary may not transfer their interest. However, once the trustee pays the beneficiary, the beneficiary may transfer the property received.

–The beneficiary’s creditors cannot reach the beneficiary’s trust interest until income or principal has been paid to the beneficiary. Of course, once the trustee pays the beneficiary, the creditors may reach the property.

–A beneficiary’s assignees cannot force the trust to pay them directly. However, the trustee may voluntarily agree, but the trustee can recommence payments to the beneficiary at any time, and the beneficiary may withdraw their direction to pay the assignee.

–Ineffective if the settlor is beneficiary (however, a growing number of states are allowing self-settled spendthrift trusts (called “domestic asset protection trust”)

Question 32

Spendthrift Ineffective Against Certain Creditors

Answer 32

Typically, a spendthrift clause cannot be used to shield the beneficiary from:

• Judgements or court orders for support or maintenance of the beneficiary’s child, spouse, or former spouse
• Claims by the government

Moreover, a creditor can reach a mandatory distribution of income or principal if the trustee did not make it within a reasonable time.

Question 33

Support Trusts

Answer 33

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.

A support trust may be mandatory or discretionary. If discretionary, the creditors’ rights are the same as they are for other discretionary trusts.

–Even w/o a spendthrift clause, the beneficiary’s interest is such that no one but the beneficiary can enjoy it; the beneficiary’s interest is not assignable by definition. (Support trusts are therefore impliedly spendthrift)

–If the instrument is silent, the standard of support is the beneficiary’s accustomed standard of living. Whether the beneficiary’s other income or resources should be taken into account is a question of the settlor’s intent and is decided by courts on a case-by-case basis.

Note: A trust to “pay all of the income to A for his support” is not a support trust. When the whole of the income is to be paid to A for his support, the words “for his support” merely state the motive for the transfer. The beneficiary is not limited to amounts necessary for his support.

Question 34

Termination of a Trust

Answer 34

A trust will automatically terminate upon the expiration of the term specified in the instrument or when all of the purposes of the trust have been accomplished or have become unlawful, contrary to public policy, or impossible to achieve.

Question 35

Termination by the Settlor

Answer 35

Under the UTC, a settlor can revoke or amend a trust unless the terms expressly state that it is irrevocable.

However, some states, even some that have adopted the UTC, follow the traditional rule, which provides that a trust is irrevocable unless the settlor expressly reserves the power to revoke or modify the trust.

–Under the law of some states, the settlor may revoke an irrevocable trust upon written consent of all living persons with vested or contingent interests.

Question 36

When may a trust be terminated or modified?

Answer 36

A trust may be terminated or modified upon the consent of the settlor (or the settlor’s agent, conservator, or guardian) and all beneficiaries, even if the modification or termination conflicts with a material purpose of the trust.

–Note: A trust also may be terminated or modified on the consent of only all beneficiaries (that is, w/o the consent of the settlor), but only if no material purpose of the trust would thereby be frustrated (“Claflin Rule”).

–Under the UTC, a court may modify a trust even w/o the consent of all the beneficiaries if: (1) the trust could have been terminated had all of the beneficiaries consented, and (2) the interest of a beneficiary who does not consent will be adequately protected.

-Material purposes likely to prevent beneficiaries from modifying/terminating a trust include: support of beneficiary, spendthrift provision, payment at certain ages, payment at certain dates, discretionary trust

Important: Watch for remote and contingent beneficiaries. All beneficiaries must consent, including unborn and unascertained beneficiaries, as well as beneficiaries of future interests, no matter how uncertain or contingent. If any beneficiaries are unborn or unascertained, there must be a party appointed to represent their interests or they must be virtually represented according to state law; otherwise, the trust may not be terminated or modified.

Question 37

Trust Modification By Court

Answer 37

Under the UTC, a court may modify a trust even w/o the consent of all the beneficiaries if: (1) the trust could have been terminated had all of the beneficiaries consented, and (2) the interest of a beneficiary who does not consent will be adequately protected.

Additionally, a 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

In some states, the court can reform the terms of the trust to reflect the settlor’s intent if a mistake in the terms is shown by clear and convincing evidence.

Question 38

Creation of Trust

Answer 38

To create a valid trust, there must be a SETTLOR who, INTENDING to create a trust for a valid TRUST PURPOSE, DELIVERS the TRUST PROPERTY to the TRUSTEE to hold for the benefit of one or more BENEFICIARIES.

–If there are no trust assets when the trust instrument is executed (e.g., the settlor promises gratuitously to create a trust in the future), a trust arises in the future only if, when the assets come into existence, the settlor manifests anew an intention to create the trust.

–This remanifestation is not required, however, if the promise is supported by valid consideration.

Question 39

Merger of Title (Trusts)

Answer 39

Results in the termination of a trust where the sole trustee is also the sole beneficiary.

Question 40

Pour-Over Gift from Will to Trust

Answer 40

Under the traditional view, to create a valid pour-over gift from a will to a revocable trust, the trust must be in existence or must be executed at the time of the will’s execution.

However, under the prevailing view, a will may devise property to a trustee of a trust established or to be established during the testator’s lifetime, i.e., the trust may be established after the will is executed but before the testator’s death.

–Additionally, pour-over gifts are valid even if the trust is unfunded during the testator’s lifetime, and even if the trust is amended prior to testator’s death.