Trusts Flashcards
General trust rule statement
A trust is a fiduciary relationship where the trustee is called upon to manage, protect, and invest certain property and any income generated for the benefit of one or more named beneficiaries.
The trustee holds the legal title to the trust property.
Should the trust be terminated, title would merge and would vest in the beneficiaries.
A valid trust requires…? (6)
(1) property
(2) beneficiaries
(3) a trustee
(4) intent
(5) creation
(6) valid legal purpose
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.
Charitable trust
(1) charitable purpose
2) benefits the community at large or a specific class of persons (poor people, women, etc.
Resulting trust
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.
Support trust
A beneficiary entitled to distribution is entitled to the right of alienation and can alienate their interest in the trust freely when the trust allows so. The creditors can only reach that right when the Trustee makes a distribution, but in a support trust where the trustee is directed to pay income or principal as necessary to support the trust beneficiary creditors cannot reach the assets of a support trust unless the creditors are providing the beneficiaries with necessaries then they can be paid directly by the trustee.
Discretionary trust
A discretionary trust is where the trustee is given complete discretion regarding whether or not to apply payments of income or principal to the beneficiary and make a distribution. If the trustee exercises his discretion to pay, then the beneficiary’s creditors are entitled to reach the trusts assets. If the direction to pay is not exercised then the beneficiary’s interest cannot be reached by his creditors.
Mandatory trust
The trustee must pay out income and principal to the beneficiaries according to the instructions of the trust. They have no discretion to choose whether to do so or not. When the money is paid out to the beneficiary the creditor has a right to it reach that property.
Spendthrift trust
Expressly restricts the beneficiaries right to transfer his or her interest in the trust. It does not allow beneficiary to actually promise or alienate his or her interest in the trust assets or income. In this case creditors usually cannot reach that money because it was specifically created as a spendthrift trust with the exception that if money is owed for tax lien, child or spousal support or basic necessities the creditor might be able to reach the money for a trust.
Settlor modification of trust
If revocable –> can modify or amend
If irrevocable –> modification or termination of an irrevocable trust can only occur with the consent of all the beneficiaries (present and future) and if the amendment would not go against the primary purpose of the trust. If the settlor creates a living trust that is irrevocable, the settlor cannot change or terminate the trust unless all the beneficiaries agree and the settlor can show that the change, modification, or termination is keeping within the purpose of the trust.
Beneficiary modification of trust
Beneficiaries can modify or terminate a trust when the settlor is deceased and has no more interest and all present and future beneficiaries consent to modify or terminate the trust.
However, Under the Clafin doctrine, a trustee can block a premature trust termination; a trustee can prevent the beneficiaries from terminating the trust when a material purpose of the trust has not been completed yet, therefore it should not be terminated. If a court finds that there’s still some important purpose left for the trust it’s not going to actually terminate or modify that trust even if they all agree. Most courts allow the trustee to block the termination if it can be shown that termination would violate the settlor’s intent.
Court modification of trust
Equitable deviation - unanticipated events have occurred and the changes would further the purpose of the trust. Court can modify in accordance with settlor’s intent, no beneficiary consent required
Removal of trustee by beneficiaries
Beneficiaries can remove a trustee if the beneficiaries believe that the trustee is not fulfilling its duties or violated a duty to them.
If the purpose of the trust is frustrated by continuing to have the trustee be the trustee or if they violated duty.
Even if circumstances have not changed in an unanticipated manner, a court may modify the terms of a trust that relate to the management of trust property if continuing the trust on its existing terms would be impracticable, wasteful, or would impair the trust’s administration.
Traditional approach: any money generated by trust property is ________ and any money generated in connection with a conveyance of trust property is ________.
Income; principal
Modern approach for trust distribution
a trustee is empowered to re-characterize items and reallocate investment returns as he deems necessary to fulfill the trust purposes, as long as his allocations are reasonable and are in keeping with the trust instrument. A distribution of stock is treated as a distribution of principal under the UPAIA.
