Trusts

Question 1

Types of trusts

Answer 1

1. Intervivos (created during settlor’s lifetime)

2. Testamentary (created in S’s will to be effective upon S’s death)

Question 2

Creation of a trust

Answer 2

Trusts are created BIT by BIT
B - named [b]eneficiary - must be clear & unambiguous (can be a class so long as everyone in the class is sufficiently identifiable by Trustee)
I - settlor’s clear [i]ntent and valid purpose - cannot be counter to pub. policy/illegal
T - property [t]ransferred to trust - trust cannot exist unless it possesses assets delivered to trustee, except for a pour over trust (will pours estate assets into an existing inter vivos trust that does not have to be funded w assets at time of creation).

*No writing required to create an inter-vivos trust unless real property involved.

NOTE: trusts are subject to RAP in half of states.

Question 3

What is a supplemental needs trust?

Answer 3

Created when TP settlor is aware of B’s need/suffering (mental or physical) AND B is or will receive govt assistance

TP may establish a supplemental needs trust to supplement govt assistance for the purpose of enhancing B’s quality of life.

NOTE: Trust must SPECIFICALLY prohibit Trustee from paying back govt with trust assets. If special needs trust is established in a will and this provision is not expressed, court may reform the lang. in the will to protect the trust from the govt’s claims.

Question 4

What is a payback trust?

Answer 4

An injured person may establish a payback trust from the proceeds (settlement or judgment) of a personal injury claim. However, upon B’s death, any remaining balance must go to pay back govt’s assistance.

Question 5

Fiduciary Duties Owed by Trustee

Answer 5

Trustee may not sell to or buy or lease from trust because of conflict of interest between T and Bs’ financial interests UNLESS:

1. expressly authorized by the trust; OR
2. probate court gives approval.

Without 1 or 2, unhappy B may: (1) rescind the transaction (under the no further inquiry rule, court will auto-rescind the transaction without making a fairness inquiry) or (2) recover T’s profit made on the transaction. (3) B may also seek the removal of T for breach of fid duty.

Question 6

Prudent Investor/Administration Rule

Answer 6

Both T’s administration of the trust AND T’s investments must be PRUDENT.

Under Prudent Admin. Rule - T required to immediately insure trust assets.

Under Prudent Invest. Rule - T must prudently invest trust assets. Generally, no single investment is prudent or imprudent - court will evaluate overall strategy and risks/returns of the entire portfolio based on TINDAD. Speculative investments are not prohibited if they are part of a prudent, diversified plan.
T - trust [t]erms and settlor’s intent
I - [i]nflation
N - [n]eeds of present and future Bs and the need to preserve capital and its appreciation
D - [d]iversification of investments
A - total [a]mount of trust
D - trust’s [d]uration - how soon will trust corpus be paid out to Bs?

Question 7

T’s duty of impartiality

Answer 7

T owes duty of care and loyalty to ALL Bs - present and future. Requires T to balance interests.

Question 8

Income B’s rights

Answer 8

Income B entitled only to income; usually has no right to demand an invasion of principal UNLESS T given an ascertainable standard to invade trust corpus by S - e.g., for income B’s HEMS

H - [h]ealth
E - [e]ducation
M - [m]edical/dental/nursing care
S -[s]upport in reasonable comfort

*Look for discretionary language (“may”) vs. mandatory language (“must” or “shall”). Standard of review is discretionary to T (abuse of discretion).

Question 9

T’s monetary allocations

Answer 9

Money coming into the trust and received by T must be allocated as either income or principal depending on the transaction type.

• Corpus: proceeds from sale of personal property; stocks; investments; and real property and stock splits
• Income: interest; rental income; cash dividends

Question 10

Modern portfolio theory

Answer 10

Invest for total maximum return, regardless of whether it comes to the trust as income or the growth of principal under the Uniform Principal and Income Act.

NOTE: Almost all states permit T to adjust distribution by fairly allocating between income/corpus.

• all ordinary expenses allocated to income
• all extraordinary expenses allocated to principal

Question 11

Unitrust

Answer 11

A trust creator may create a “unitrust,” making distinctions between income and corpus irrelevant. Unitrust directs trustee to simply distribute a percentage of the total annual market value of the trust each year to income Bs.

NOTE: some states allow T (with notice to all Bs) to ask the court to convert a trust to a unitrust.

Question 12

Directed trusts/trustees

Answer 12

DIRECTED TRUST - bifurcates the trust’s responsibility to a directed trustee who consults with/follows directions from a non-trustee “trust advisor” who has expertise in the particular trust’s assets

45 states have adopted Uniform Directed Trust Act.
NB: Trustee relieved from liability for following trust advisor’s directions.

Question 13

Revocable Lifetime Trusts (avoids probate)

Answer 13

Settlor transfers property to trust, taking a life estate, naming herself or TP trustee (generally self), and expressly providing for the right to amend/revoke at any time during her life or even in her will through specific reference to the trust. Can add/remove assets during her life. Upon death, property passes directly to T’s Bs.

NOTE: if trust appoints a T other than S, S who still owns/controls the trust assets, is free to terminate the trustee and appoint another/herself. T must do what S says, even if instructions imprudent. S’s intent controls!!

S’s property must be transferred to trust and if registration required, must be in trust’s name or else it passes at death to decedent’s probate/intestate estate.

Rev. Lifetime Trusts do NOT have spendthrift protection for S’s judgment creditors (self-settled) and they augment a decedent’s net estate for decedent’s surviving spouse’s right of election.

RAP does not start to run until S’s death.

Question 14

Spendthrift Trusts 1/2

Answer 14

Majority - Trust B’s creditors can reach trust assets UNLESS trust expressly contains spendthrift clause.
Minority - automatically present spendthrift protection.

Spendthrift protection shields trust assets from: (1) B’s judgment creditors; (2) B herself; (3) B’s trustee in bankruptcy.

Income B of a spendthrift trust cannot assign away trust income before it is received from the trustee. Must have $ in hand. However, once corpus is distributed to a B, it loses spendthrift protection.

Question 15

Spendthrift Trusts 2/2

Answer 15

Creditors cannot seize spendthrift trust income/corpus while it remains in trust, except for SENATE.
S - [s]elf-settled or revocable lifetime trusts (ST protection only afforded where TP set up trust for other Bs; S’s creditors are entitled to the max amount that could be paid to S). NOTE: Minority permits the creation of “asset protection trusts” where S funds trust herself and may avoid claims by future creditors by making it spendthrift, BUT trust must have been established before claims arose.
E - in a majority of states, trust was not [e]xpressly made spendthrift
N - [n]ecessaries furnished to B - creditors can recoup fair market value of necessities.
A - [a]limony and child support payments (public policy; T may be ordered to make payments)
T - federal income [t]axes (supremacy clause)
E - services [e]xception for trust payments made for legal fees/other services needed to protect B’s interest in the trust

Question 16

Trust Reformation/Modification

Answer 16

Trust language may be modified by court when S unaware of certain facts/laws/changes in circumstance.

“Equitable deviation” gives effect to S’s intent, which must be established by clear and convincing evidence.

Trust modification permitted due to circumstances or change in the law not anticipated by S if it will further the purpose of the trust.

Question 17

Trust Decanting

Answer 17

Uniform Trust Decanting Act - T has power to distribute trust assets; can pour assets from an irrevocable trust into another trust (decant), thereby modifying original trust IF GIVEN DISCRETION as to when or among whom to distribute trust assets. Decanting may extend trust term or exclude a particular B, but T may NOT decant trust property to a new trust with entirely new Bs.

If NO DISCRETION over corpus distribution, then Trust Decanting Act does not apply/T may not decant.

Decanting does not require a court order but requires notice to all Bs

Question 18

Charitable Trusts

Answer 18

*Not subject to RAP
Generally overseen by state AGs.

Charitable trust MUST have a charitable purpose that benefits community, the poor, or educational/religious institutions.

If named charity ceases to exist before the gift is made, then court - using cy pres doctrine - may benefit a similar charity to named charity, provided the trust/will had a general charitable intent.

Rebuttable presumption that charitable bequest is “general,” but where T’s charitable intent was very specific/exclusive, Cy Pres will not apply.

NOTE: a gift over provision in a will defeat’s court’s use of cy pres.

Question 19

Trust litigation

Answer 19

Most frequently arises when B attempts to terminate trust.
Court may terminate non-economical trusts. Where an income B or S of inter-vivos trust seeks to terminate, generally court approval is required; no court order required to term a revocable lifetime trust.

• Common law presumption (minority) - inter vivos trust is not revocable unless expressly provides otherwise. If S of an intervivos trust did not expressly reserve right to revoke, then S must obtain consent of all Bs (present + future interests). However, if Bs include infants or incompetents, legally incapable of consenting and trust may not be terminated.
• Uniform Trust Code (majority) - trust is revocable by S unless terms expressly say irrevocable. Power to revoke impliedly permits S to amend trust instrument.

NOTE: strong public policy against terminating trusts when S dead. Requires consent of all Bs and trust must serve no further “material” purpose. Courts generally try to find a purpose to preserve a trust.

Question 20

Powers of Appointment

Answer 20

Generally created for property placed in a trust. Intended to provide greater flexibility for future trust distributions and postpone to whom and in what amount trust property passes to Bs. Powers are usually exercised by either a B with a life estate in the trust or by T.

POA is created by S. Prop deemed to pass from S to appointee.
8 types of powers of appointment - GENT’S PIN
G - [g]eneral power
E - [e]xclusionary power
N - [n]ongeneral - any power not a general power
T - [t]estamentary power
S - [s]pecial (limited) power
P - [p]ostponed power
I - [i]mperative power
N - [n]onexclusionary power

• Special power - may be exercised only to a special, limited class of persons. Power holder cannot pass the property to anyone other than a member of the special class. Can be exclusionary or non-exclusionary. Exclusionary = give power to exclude some class members and give it all to other class members. Absent contrary language, presumed donor intended a special power to be exclusionary. If non-exclusionary, distribution must include all members of the class [common law - nominal share ok; R3 Trusts - must be reasonable amount].
• General power has no class restriction. Power holder can appoint anyone including herself or her estate.
• Postponed power is not currently exercisable (only after the passage of time or upon a stated event). Testamentary power = most frequently used postponed power; exercisable only in powerholder’s will.
• Imperative power mandates power holder must exercise the power. Failure to do so results in that interest passing to a named TP who takes in default of the power not being exercised. If power is not made imperative, presumed non-imperative. Imperative power must be exercised during power holder’s lifetime/or in their will (unless otherwise expressed). Residuary clause in power holder’s will does not effectively exercise an imperative testamentary power - it must be specifically mentioned in a will.
• If a non-imperative testamentary special power is not exercised in donee’s will, it impliedly passes to the designated class in equal shares.
• POA is personal to the power holder - cannot assign, sell, or delegate the authority to a TP.