Trusts

Question 1

Revocable versus Irrevocable Trusts, Traditional vs UTC rule

Answer 1

A revocable trust can be terminated by the settlor at any time. An irrevocable trust usually
cannot be terminated.

Traditional rule—a trust is presumed to be irrevocable unless it expressly states otherwise.

Uniform Trust Code (UTC) and in a majority of jurisdictions—a trust is presumed revocable unless it expressly states that it is irrevocable.

Question 2

Mandatory versus Discretionary Trusts

Answer 2

A mandatory trust requires the trustee to distribute all trust income.

In a discretionary trust, the trustee is given the power to distribute income at his discretion. The trustee does not abuse
his discretion unless he acts dishonestly or in a way not contemplated by the trust creator.

Question 3

Trusts and Rule Against Perpetuities

Answer 3

Trusts are subject to the Rule Against Perpetuities. Therefore, a trust may fail if all interests
thereunder may not vest within the applicable period of perpetuities (usually a life in being plus
21 years). Some jurisdictions take a “wait and see” approach to the application of the rule,
refraining from invalidating future interests until it is clear that they will not vest within the
perpetuities period.
Exam Tip 2: Not a frequently tested issue.

Question 4

2 kinds of Beneficiaries of trusts

Answer 4

Beneficiaries—receive the benefit of the trust.

 Income Beneficiaries—receive income from the trust (e.g., profits from a business held
by the trust).

 Remainder Beneficiaries—entitled to the trust principal upon termination of the trust.

Question 5

Private Express Trust Elements (No explanation, just elements)

Answer 5

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

intent
Trust Property
Valid Trust Purpose
Ascertainable Beneficiaries

Question 5

Private Express Trust Elements (No explanation, just elements)

Answer 5

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

intent
Trust Property
Valid Trust Purpose
Ascertainable Beneficiaries

Question 6

Private Express Trust: intent element

Answer 6

Intent
The settlor must intend to make a gift in trust. The settlor’s intent may be manifested
orally, in writing, or by conduct.

Question 7

Private Express Trust: Trust Property element

Answer 7

A valid trust must contain some property that was owned by the settlor at the time the trust
was created and was at that time transferred to the trust or to the trustee.

 Any property interest, including real property, personal property, money, intangibles, partial interests, or
future interests (whether vested or contingent) are sufficient.

Question 8

Private Express Trust: Valid Trust Purpose element

Answer 8

A trust can be created for any purpose, as long as it is not illegal, restricted by rule of law or
statute, or contrary to public policy. Terms that violate public policy will be stricken from
the trust; the trust will not fail overall unless the removal of the terms is fatal.

(Recently tested): Trust provisions that restrain a first marriage have generally been held to
violate public policy. However, a restraint on marriage might be upheld if the trustee’s
motive was merely to provide support for a beneficiary while the beneficiary is single.

Question 9

Private Express Trust: Ascertainable beneficiaries Elements

Answer 9

The beneficiaries must be identifiable so that the equitable interest can be transferred automatically by operation of law and directly benefit the person.

 The settlor may refer to outside writings or acts to identify beneficiaries.

There are exceptions, listed on another card

Question 10

Exceptions to Identifiable Beneficiaries element

Answer 10

Exceptions to Identifiable Beneficiaries:

• Indefinite Class: A trustee can select a beneficiary from an indefinite class (such as
“my friends”), unless the trustee must distribute equally to all members of the
indefinite class (not valid).

• Unborn children: Trusts for the benefit of unborn children are valid, even though
the beneficiaries are not yet ascertainable at the time the trust is created.

• Class Gifts: Trusts for a reasonably definite class (such as “my brothers”, or “my
grandchildren”) will be upheld.

• Charitable trusts (trusts that exist for the good of the public at large) must not have
individual ascertainable beneficiaries.

Question 11

Types of Private Express Trusts

Answer 11

Inter vivos trust
An inter vivos trust is a trust created while the trustor is living that transfers some or all of
the trustor’s property into a trust. The trustor can designate himself or a third party as the
trustee.

Testamentary trust
A testamentary trust is created in writing in a will or in a document incorporated by
reference into a will. The will containing the trust must meet the attested or holographic
will requirements.

Question 12

Pour-Over Provision Inter vivos trust

Answer 12

A pour-over is a provision in a will that directs the distribution of property to a trust upon the happening of an event, so that the property passes according to the terms of the trust without the necessity of the will reciting the entire trust.

 (Recently Tested): A will may “pour over” estate assets into a trust, even if the trust instrument was not executed in accordance with the Statute of Wills, as long as the trust is identified in the will, and its terms are set forth in a written instrument.

• A later amendment to the trust will apply to the assets passed to the trust by the previously executed pour-over will.

Question 13

Charitable Trusts

Answer 13

For a trust to be considered charitable, it must have

a stated charitable purpose and

it must exist for the benefit of the community at large or for a class of persons the membership in which varies.

Question 14

Charitable Trusts: Charitable Purpose

Answer 14

a. Charitable Purpose
Purposes considered to be charitable include the relief of poverty, the advancement of
education or religion, and other purposes benefiting the community at large or a particular
segment of the community.

Question 15

Charitable Trusts: Indefinite Beneficiaries

Answer 15

b. Indefinite Beneficiaries
The community at large, or a class comprising unidentifiable members, not a named
individual or a narrow group of individuals, must be the beneficiary of a charitable trust.

Question 16

Charitable trusts and RAP

Answer 16

. Rule Against Perpetuities

Charitable trusts are not subject to the Rule Against Perpetuities and may continue
indefinitely

Question 17

Cy Pres Doctrine

Answer 17

Cy Pres Doctrine (Recently Tested)
A court may modify a charitable trust to seek an alternative charitable purpose if the
original one becomes illegal, impracticable, or impossible to perform.

Exam Tip 4: Look for facts indicating that a trust was created for the benefit of
a charity that no longer exists (such as a retirement home, college or university,
or zoo). There will usually be a similar charity that is in existence and it will ask
the court to modify the trust and substitute it as the beneficiary of the trust.

 Specific or General Intent:
To determine whether it should modify the trust, a court will analyze whether the trust has a specific intent to help one charity or a general intent to help charity.
• If there is specific intent, the court may not modify the trust and the trust will be
terminated and become a resulting trust (an implied trust that is held for the settlor
or his/her heirs).
• If there is general intent, the court will substitute a similar charity.
• The modern approach is to presume a general intent and apply the cy pres doctrine.

Exam Tip 5: To earn full credit on the exam, you must carefully analyze
whether the trustor intended for the trust to only benefit one specific charity
(such as one specific retirement home), or if the trustor intended to generally
benefit charity (all retirement homes).

Question 18

Remedial Trusts

Answer 18

When a trust fails in some way or when there is an incomplete disposition of trust property, a
court may create a resulting trust requiring the holder of the property to return it to the settlor
or to the settlor’s estate. When a testamentary trust fails, the residuary legatee succeeds to the
property interest. The purpose of a resulting trust is to achieve the settlor’s likely intent in
attempting to create the trust.

Question 19

Beneficiary/Creditor Rights to Distribution (3 kinds)

Answer 19

• Income Beneficiaries: Receive income from the trust (example, profits from a business held by
the trust).
• Remainder Beneficiaries: Entitled to the trust principal upon termination of trust.
• Creditors (Recently tested): A beneficiary’s creditors may reach trust principal or income only
when such amounts become payable to the beneficiary or are subject to her demand.

Question 20

Alienation in trusts?

Answer 20

A beneficiary’s equitable interest in trust property is freely alienable (it can be sold or used as
collateral for a loan) unless a statute or trust instrument limits this right.

Question 21

Support Trusts

Answer 21

A support trust directs the trustee to pay income or principal as necessary to support the trust
beneficiary. Creditors cannot reach the assets of a support trust, except to the extent that a
provider of a necessity to the beneficiary can be paid directly by the trustee.

Question 22

Discretionary Trust

Answer 22

The trustee is given complete discretion regarding whether or not to apply payments of
income/principal to the beneficiary.

If the trustee exercises his discretion to pay, then the beneficiary’s creditors have the same
rights as the beneficiary, unless a spendthrift restriction exists. If the discretion to pay is not
exercised, then the beneficiary’s interest cannot be reached by his creditors.

The beneficiary of a fully discretionary trust lacks standing to challenge the actions or inactions
of the trustee unless there is a clear abuse of discretion.

Question 23

Mandatory Trust

Answer 23

Trustee has no discretion; the trust governs when trust property is to be distributed

Question 24

Spendthrift Trust

Answer 24

A spendthrift trust expressly restricts beneficiary’s power to voluntarily or involuntarily transfer
his equitable interest (this is called a spendthrift clause).

Creditors usually cannot reach the trust interest, unless money is owed for child/spousal
support, or to basic necessities providers, or tax lien holders.

Question 25

Settlor’s Power to Revoke or Amend, traditional and Majority

Answer 25

If a settlor of a trust has the power to revoke a trust, she also has a power to modify or amend
the trust. In the absence of such power, modification, amendment, or termination can occur
only with the consent of all beneficiaries and if the proposed change will not interfere with a
primary purpose of the trust.

o Under the traditional rule—a trust is presumed to be irrevocable unless it expressly states
otherwise.

o Under the Uniform Trust Code (UTC) and in a majority of jurisdictions—a trust is presumed
revocable unless it expressly states that it is irrevocable.

o An amendment to a trust does not have to be executed with the formalities prescribed for
the execution of a will. No witness or signature requirements!

Question 26

Beneficiaries Power to Revoke or Amend

Answer 26

o A trust terminates automatically only when the trust purpose has been accomplished.
o A trust may also terminate if the settlor is deceased/has no remaining interest, and all the
beneficiaries (this includes the income beneficiaries and remainder beneficiaries) consent.
However, a trustee can block a premature trust termination by the beneficiaries if the trust
is shown to have an unfulfilled material purpose.
o The most common example of a trust that has an unfulfilled material purpose is one in
which the settlor provided for successive interests, in which case both the present and the
future beneficiaries must agree in order for the trust to be terminated prematurely.

Question 27

Trust Modification and Termination: Trustee, power to terminate and removal

Answer 27

o Trustee’s Power to Terminate—none, unless the trust contains express termination
provisions.
o Removal of Trustee—a court can remove a trustee if the purpose of the trust would be
frustrated by the trustee’s continuance in office or if the trustee violated a duty.

Question 28

Disclaimer and future interests

Answer 28

Disclaimer
Almost all states have enacted statutes that permit beneficiaries of trusts to disclaim their
interest in the trust property. In most states, a disclaimer is not effective unless it is reduced to
writing within nine months after the future interest would become “indefeasibly vested.” If the
income beneficiary of a trust disclaims her interest, then the trust principal becomes
immediately distributable (accelerates) to the remainder beneficiaries of the trust if the
remainder is vested. If the remainder is contingent upon a condition, the remainder will not
accelerate.

When the holder of a future interest effectively disclaims that interest, the disclaimant is
deemed to have predeceased the life tenant.

Question 29

Trusts: Lapse of a Gift

Answer 29

In most states, anti-lapse statutes do not apply to nonprobate gifts, and, therefore, if a gift to
“issue” fails by reason of the non-survival of the issue, then children and further descendants of
the deceased issue will not take under the trust.

However, some states have enacted UPC § 2-707 or a similar statute, under which a substitute
gift is created in the descendants of the deceased issue. When such statutes govern, even
words of survivorship (e.g., “to those of my issue who are living”) will not cut off this substitute
gift.

Question 30

Trustee Powers

Answer 30

The trustee has powers granted expressly in the trust, and powers necessary to act as a
reasonably prudent person in managing the trust, including the implied power to contract, sell,
lease, or transfer the trust property.

Question 31

Trustee: Duty of Loyalty

Answer 31

Duty to administer trust in good faith (subjective standard) and to act reasonably (objective
standard) when investing property and otherwise managing the trust solely in the best interests
of the beneficiaries.

Question 32

Trustee: Self-Dealing

Answer 32

 When the trustee personally engages in a transaction involving trust property, a conflict
of interest arises between the trustee’s duties to the beneficiaries and her own personal
interest.
 Prohibited transactions—buying/selling trust assets, selling property between trusts
that trustee manages, borrowing from or making loans to trust, using trust assets to
secure personal loan, engaging in prohibited transactions with friends/relatives, or
otherwise acting for personal gain through trustee position.

 There is an irrebuttable presumption that trustee breached duty of loyalty when self dealing is an issue; no further inquiry into trustee’s reasonableness or good faith is required because self-dealing is a per se breach.

 Exceptions: Even when self-dealing is authorized (by settlor, court order, or all
beneficiaries), transaction must still be reasonable and fair to avoid liability for breach.

 Remedy: The beneficiaries can set aside the transaction or ratify the transaction and
recover the profits from the transaction.

Question 33

Trustee: Conflict of Interest

Answer 33

When a trustee invests trust assets in a corporation in which the trustee has an interest
(for example, owns stock in the corporation) that might affect the trustee’s judgment, a
conflict of interest arises.
 There is a presumption of a breach of the duty of loyalty that can be rebutted by
showing that the terms of the transaction were fair or that the transaction would have
been made by an independent party.

Question 34

Duty of Prudence Trustee

Answer 34

General duty to act as a reasonably prudent person and treat the trust property as if it was
his/her own.
o Duty to follow the trust directions and carry them out in accordance with the trust.

Question 35

Trustee: Prudent Investor Rule

Answer 35

 Prudent Investor Rule: Requires trustee to act as a prudent investor would act when
investing his own property (putting less emphasis on risk level); trustee must exercise
reasonable care, caution, and skill when investing and managing trust assets

Question 36

Trustee: Duty to Diversify

Answer 36

Duty to Diversify: Trustee must adequately diversify the trust investments in order to
spread the risk of loss under a total performance portfolio approach, but not if
administrative costs would outweigh the benefits.

Question 37

Trustee: Duty to Make Property Productive

Answer 37

Duty to Make Property Productive: Pursue all possible claims, derive the maximum
amount of income from investments, sell assets when appropriate, secure insurance,
pay expenses, and act within a reasonable period of time in all matters.

Example 4: If the trust contains rental property, the trustee has a duty to try
and rent the property; a failure to try and rent the property would be a breach
of duty.

Question 38

Trustee: Duty to be Impartial

Answer 38

Duty to be Impartial: Balance interests of the present beneficiaries (must not favor one
of the present beneficiaries over the others, unless trust provides for it).
Example 5: Settlor’s trust states that Trustee is to equally distribute the rent
from an apartment to S’s three children, A, B, and C. A suffers from a health
condition and is unable to work. Trustee distributes 2/3 of the rent from the
Trusts Essay Workshop | © 2021 Themis Bar Review, LLC | 11
apartment to A and only 1/3 to B and C. Trustee has breached his duty of
impartiality.

Question 39

Trustee: Additional Duty to be Impartial

Answer 39

Additional Duty to be Impartial: The Trustee must balance the interests of the present and
future beneficiaries by investing property so that it produces a reasonable income for the
income beneficiaries while preserving the principal for the remainder beneficiaries.
Example 6: Settlor’s trust states that A and B are to receive the income from
the trust for life (A and B are therefore present income beneficiaries) and upon
their death all of the trust assets are to go to C (C is a remainder beneficiary).
Trustee invests the trust money into a high risk stock that pays frequent and
substantial dividends (trust income), but the stock decreases in value by 50%.
The present income beneficiaries, A and B, are receiving high income, but the
remainder beneficiaries will receive a reduced principal; this would be a breach
of duty of impartiality.

Question 40

Duty to Disclose, Duty to Account, Remedies for Violation of Trustee’s Duties

Answer 40

Duty to Disclose: Disclose complete and accurate information about nature and extent of
the trust property, including allowing access to trust records and accounts.
o Duty to Account: Periodically account for actions taken on behalf of the trust so that
trustee’s performance can be assessed against the terms of the trust.
o Remedies for Violation of Trustee’s Duties: Lost profits, interests, and other losses resulting
from a breach of trust are trustee’s responsibility; beneficiaries may sue the trustee and
seek damages or removal of the trustee for breach of duties.