Trusts

Question 1

Splitting of ownership

Answer 1

Trustee: legal interest + fiduciary duties

Beneficiary: equitable title.

Question 2

Trustee FD

Answer 2

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

Question 3

Types of basic trusts

Answer 3

Express trusts: created by express intention of settlor

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

Operation of law:

• resulting trusts: presumed intention of owner of property
• constructive trust: equitable remedy to prevent unjust enrichment

Question 4

Elements of an EXPRESS trust (basic elements)

Answer 4

1. settlor with capacity to convey (legal capacity, no fraud/undue influence)
2. present intent to create a trust relationship (no formal words required–can be conduct even, must intend to take effect immediately, no precatory language)
3. competent trustee with duties
4. definite beneficiary (can be definite even though not yet ascertainable. Must be ascertainable at time interests come into enjoyment. same w/ class gifts–trustee needs to ascertain who belongs to class). Common law: must be reasonably definite class. UTC: trustee may select from indefinite class. If fails, trust created for settlor.
5. specific property then owned by the settlor (must be ascertainable with certainty–future interests okay as long as legally entitled to it)
6. valid trust purpose (can’t be contrary to public policy, impossible to achieve, intended to defraud settlor’s creditors, or illegal).

*sole trustee can’t be sole beneficiary

Question 5

Anti-Lapse Statutes + Trusts

Answer 5

1. Where a remainder interest is conditioned on a beneficiary surveying the settlor and the beneficiary does not meet the condition, his interest fails.
2. Nearly all states, HOWEVER, have anti-lapse statues that operate to save a gift to a predeceasing beneficiary if the beneficiary was in a specified degree of relationship to the testator and left surviving descendants.
3. Several 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 non-survival.
4. MOST STATES, however, anti-lapse statutes only apply to testamentary gifts, not trusts.
   
   1. if you don’t want give to lapse, have ot include express language in the trust.

Question 6

Divorce

Answer 6

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 7

Removal of Trustee

Answer 7

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 circumstances. The basic factor considered is whether continuation in office would be detrimental to the trust.

Question 8

SoF and Trusts

Answer 8

Oral trusts are okay as long as established by clear and convincing evidence

Only trusts for land need to be in writing, but part performance (if holder of legal title acts as trustee) will preclude SoF defense.

Extrinsic evidence allowed

Question 9

Pour-Over Gift from Will to Trust

Answer 9

Under the Uniform Testamentary Additions to Trusts Act, a settlor can make gifts by will to a trust—even an amendable and revocable trust—established during their lifetime. The trust must be clearly identified from language in the will.

Traditional view: trust must be established before or contemporaneously with will.

Modern view: trust just needs to be established prior to testator’s death.

****Trust need not be funded until property pours over after settlor’s death, as long as trust is: (1) identified in the will and is (2) executed before the testator’s death.

Question 10

Presumption of Freely Transferrable Interests

Answer 10

Voluntary Transfers—Gifts and Sales

Absent restrictions by statute or by the trust instrument, a beneficiary may freely transfer their interest in the trust. The assigned interest remains subject to all previous conditions and limitations.

Involuntary Transfers—Creditors

Unless statute or the trust provides otherwise, the beneficiary’s creditors may reach the beneficiary’s interest in the trust [NOT THE TRUST PROPERTY ITSELF–so if interest doesn’t come into existence until trust ends, then can’t get it until the trust ends]. The interest is subject to judicial sale. To avoid this, a court may order the trustee to pay the beneficiary’s income to the creditors until the debt is satisfied.

Question 11

Discretionary Trusts

Answer 11

Definition: trustee is given complete discretion whether to apply or withhold payments of income or principal (or both) to a beneficiary

Creditor’s rights: before trustee makes payments to beneficiary, beneficiary’s interest not assignable and can’t be reached by creditors–beneficiary only has an expectancy to be a beneficiary. Creditor’s can attach B’s interest, but can’t compel trustee to make distribution. Court can force trustee to satisfy judgment or order against beneficiary for support or maintenance of B’s child, souse, former spouse.

Beneficiary’s rights: no right to payment. Court can’t interfere unless trustee abuses his or her discretion

Question 12

Spendthrift Trusts

Answer 12

Definition: precludes beneficiary from voluntarily or involuntarily transferring interest tin the trust, and beneficiary’s creditors are precluded from reaching it to satisfy their claims.

Creditor’s rights: none–they can’t reach it or even attach it like they can in a discretionary trust. However, claims by government or judgments or court orders for spousal maintenance of b’s child, spouse, or former spouse can reach it.

Beneficiary: can’t transfer interest until after they’re paid. Also, beneficiary who is also settlor can’t protect their own property from creditors, unless state allows DAPT.

Question 13

Support Trust

Answer 13

Definition: directs trustee to pay only so much of the income or principal (or both) as is necessary for beneficiary’s support. Support trust may be mandatory or discretionary. If discretionary, creditors’ rights are same as other discretionary trusts.

Beneficiary cannot assign their interest. So, even without spendthrift provision, its impliedly spendthrift.

Mere words “for his support” do not create a support trust. Just a regular trust

Question 14

Revocation of Trust

Answer 14

1. By terms of trust
2. By settlor (under UTC, settlor can revoke or amend unless terms expressly state its irrevocable. Some other states say that irrevocable unless settlor expressly reverses power to revoke or modify. At CL, presumed to be irrevocable trusts, settlors may revoke with written consent of all living beneficiaries).
3. By beneficiaries
   
   1. With settlor’s consent: settlor and all beneficiaries
   2. Without settler’s consent: all beneficiaries ONLY if no material purpose of trust would be frustrated.
      
      1. material purposes: support of beneficiary, spendthrift provision, payment at certain ages, payment at certain dates, discretionary trust.
      2. If trustee obliges and does it even if material purpose frustrated, he doesn’t get in trouble.
4. By operation of law (property exhausted, legal equitable titles merge)
5. By the court
   
   1. If termination or modification is not available because not all of the beneficiaries consent, 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 non-consenting beneficiaries will be adequately protected.
   2. unanticipated circumstances
   3. continuation is impracticable or wasteful
   4. value of trust is insufficient to justify cost
6. By the trustee
   
   1. Uneconomic
   2. combination and division of trusts (must provide ben’s notice, and can’t impair their rights)

Question 15

Imperative (mandatory powers)

Answer 15

Power is imperative if the trust instrument requires its exercise. If a trustee fails or refuses to perform under an imperative power, a court will, upon petition, order the trustee to exercise the power as required by the trust instrument

Question 16

Discretionary Powers

Answer 16

• Definition: trustee may or may not perform these powers. Must exercise power in good faith
• Abuse or failure to exercise: abuse of discretion

Question 17

Fiduciary Duties

Answer 17

1. Duty to administer trust in a good faith and prudent manner. Must act impartially between beneficiaries
2. Duty of loyalty (Ex: can’t buy sell trust assets, may not sell property of one trust to another trust in which they are also trustee, can’t borrow trust funds or loan personal funds, cannot use trust assets to secure a personal loan, cannot personally gain, corporate trustee cannot invest in its own stock. GOOD FAITH AND BENEFIT DON’T MATTER)
   
   1. Voidable by beneficiary unless court approved it, ratification release, consent, etc.
3. Duty to report
4. Duty to NOT commingle
5. Duty to enforce claims and defend trust from attack
6. Duty to preserve trust property and make it productive

Question 18

Uniform Prudent Investor Act

Answer 18

1. Trustee must exercise reasonable care, skill, caution when investing and managing trust assets
2. Portfolio approach: prudence evaluated as overall investment strategy.
3. Factors considered:
   
   1. general economic conditions possible effect of inflation or deflation
   2. expected tax consequences of investment decisions or strategies
   3. role that each investment plays w/in overall trust portfolio
   4. expected total return
   5. other resources of beneficiaries
4. Trustee must diversify unless reasonably determines it should not

Remedy: trustee liable for losses resulting from breach and for any profit that would have accrued to the trust but for the breach plus interest

Question 19

Remedy for breach of trust duties (breach of administering trust)

Answer 19

In general: if trustee commits, or is about to commit, breach of trust duties, court may (1) enforce specific performance of trustee’s duties, (2) enjoin trustee from committing breach of trust, (3) compel trustee from committing breach of trust, (4) compel trustee to pay money or restore property, (5) suspend or remove trustee.

Damages:

• amount necessary to restore trust property absent breach
• trustees’ profit from the breach
• pay profit gained from administration of trust even if no breach

Question 20

Remedy for self-dealing (duty of loyalty)

Answer 20

1. affirm transaction
2. set aside transaction if trust lost money
3. trace profits from trustee if trustee profited

Question 21

A Trustee is NOT liable for breach if…

Answer 21

1. acted in reasonable reliance on the trust terms
2. beneficiary
   
   1. consented to conduct
   2. released trustee
   3. ratified

Question 22

Grounds upon which trustee can be removed by court

Answer 22

Can be removed if detrimental to the trust

1. incapacity
2. unfitness
3. commission of serious breach of trust
4. conflict of interest
5. insolvency
6. extreme hostility between trustee and beneficiaries and it interferes with admin of trust
7. refusal to psot bond
8. refusal to account
9. lack of cooperation among co-trustees that substantially impairs trust admin
10. unwillingness or persistent failure to admin trust
11. substantial change in corcumstances

**courts will consider settlor’s intent

Question 23

Adjustment Power (UPAIA)

Answer 23

Act that allows trustee an adjustment per to reallocate investment portfolio return between income and principal.

Must be fair to all beneficiaries. If resulting distribution effects settlors intent and purposes of trust, then nothing further needs to be done. However, if the trustee determines that by distributing only trust income the trustee is unable to comply with fairness requirements, can adjust between principal and income as necessary

Question 24

Charitable Trust Requirement

Answer 24

1. Must have charitable purpose
   
   1. no special language required as long as clear intent
2. Beneficiaries must be indefinite
3. Cy pres doctrine applies
   
   1. settlor has general charitable intent (presumed to be so under UTC)
   2. charitable purpose selected by settlor is impracticable, unlawful, impossible to achieve, or wasteful
   3. court picks chart as near as possible.
4. Rule of Perps does not apply unless shifts between charitable and private

Question 25

Honorary Trusts

Answer 25

1. Not for charity and no private beneficiaries. Est. for animals, burial place maintenance
2. CL: no human beneficiary to enforce, so trustee “on their honor”
   
   1. most states, absent statutes, on basis on RAP say can’t endure for more than human life in being plus 21 years
3. UTC: enforceable by someone named in trust instrument or appointed by court.
   
   1. Can’t be enforced for more than 21 years

Question 26

Resulting Trust

Answer 26

1. purchase money resulting trusts
   
   1. x furnishes consideration for property, transfers title to y.
   2. Burden on X (beneficiary) to provide by clear and convincing evidence they supplied evidence
   3. Y can rebut by saying no trust was intended or it was a gift, loan to Y, or satisfaction of debt owing to Y
   4. No PMRT for the beneficiary (X) when parties closely related, unlawful purpose, transferee obtained title wrongfully.
2. resulting trusts arising from failure of express trust
   
   1. trust void or unenforceable
   2. beneficiary dead or can’t be located
   3. failure of cy pres
   4. Resulting trust not implied when:
      
      1. trust instrument provides for disposition os trust property
      2. settlor given CONSIDERATION for OG transfer
      3. settlor created trust for illegal purpose
      4. cy pres applicable
3. resulting trusts arising from incomplete disposition of trust assets.
   
   1. trust purpose fully satisfied and some trust property still remains

Beneficiaries of a resulting trust are the settlor or his successors in interest!

Question 27

Constructive Trusts

Answer 27

1. Flexible equitable remedy to prevent unjust enrichment.
2. Equity returns the holder of legal title into a trustee when they may not in good conscience retain the beneficial interest in the property
3. The trustee’s only duty is to convey the property to h person who would have owned it but for the wrongful conduct.

Question 28

Ascertainability of beneficiaries

Answer 28

• Beneficiaries need not be identified at the time a trust is created but must be susceptible of identification by the time their interests are to come into enjoyment
• Trust beneficiaries may be a class, as long as the class is sufficiently definite
• The settlor can give the trustee discretion to select class members as long as the class is reasonably definite; if it is too broad the trust (or a portion thereof), will fail.
• Failed portion will result in a trust in favor of the settlor or the settlor’s successors in interest.

Question 29

When portion of trust fails for lack of a beneficiary

Answer 29

Failed portion will result in a trust in favor of the settlor or the settlor’s successors in interest.

Question 30

More on Revocability

Answer 30

• UTC: trust is revocable unless stated otherwise
• Common law: trust is irrevocable unless the power to revoke or amend is specifically stated.

Power to revoke, then power to amend the trust–can add additional assets during its lifetime, revoke it.

Question 31

Power of appointment

Answer 31

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 person who shall take certain property and the manner in which they shall take it.

• General power: can appoint to self, own estate, own creditors
• Special power: can appoint to specific class and not self, estate, or creditors.

Timing:

• A presently exercisable power is only exerciseable by the donee during her lifetime.
• Testamentary power exercised only by donee’s will

Question 32

Testamentary Trust: Secret and Semi-Secret Trusts

Answer 32

• Generally, the trust intent and essential terms if the trust (res, beneficiaries, 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 33

Secret and Semi-Secret Trusts

Answer 33

• Secret trust: settlor agrees with a will beneficiary that the beneficiary will hold the property in trust for someone else, and relies on that promise, but will does not state the trust nature of the gift.
  
  • This promise can be made before or after will executed!
    
    • Intended trust beneficiary may present extrinsic evidence of the will beneficiary’s promise to hold the property in trust.
    • If promise can be proved by clear and convincing evidence, a constructive trust will be imposed on property in favor of intended beneficiary.
• Semi secret trust: the will makes a gift in trust but failed to name the beneficiary. The gift FAILS and the named trustee holds the property on a resulting trust for testators successors in interest.