Trusts

Question 1

What are the elements of a valid trust?

Answer 1

Intent
• Identifiable corpus
• Ascertainable beneficiaries
• Proper purpose
• Mechanics and formalities

Question 2

What are the elements of an express trust under the UTC?

Answer 2

(1) a settlor
with capacity to convey, (2) a present intent to create a
trust relationship, (3) a competent trustee with duties, (4) a
definite beneficiary, and (5) the same person is not the sole
trustee and sole beneficiary. Additionally, there must be a
present disposition in trust of specific property then owned
by the settlor, and the trust must have a valid trust purpose.
Consideration is not required.

Question 3

What is a precatory expression?

Answer 3

A settlor’s expression of a hope, wish, or mere suggestion
that the property be used in a certain way is called precatory language. The usual inference is that precatory expressions do not create a trust because the settlor must impose a legal obligation on the transferee, not merely a moral one

Question 4

How is precatory language in a trust overcome?

Answer 4

Definite and precise directions
•
Directions addressed to a fiduciary (for example, executor under a will)
•
A resulting “unnatural” disposition of property (for example, close relative will otherwise take nothing) if no trust imposed; or
•
Extrinsic evidence showing that the settlor previously supported the intended beneficiary

Question 5

What happens when the beneficiary and the trustee are the same person?

Answer 5

If the sole trustee and sole beneficiary are the same individual, the equitable and legal titles merge and the trust terminates.

Note; the trustee and beneficiary can be the same if there is another beneficiary

Question 6

What is the capacity needed to be a beneficiary of a trust?

Answer 6

Any person or entity capable of taking and holding title to
property can be a beneficiary of a private trust. The beneficiary
need not be competent.

Question 7

When is a disclaimer to a trust valid?

Answer 7

Many state disclaimer statutes require that a disclaimer be
made within nine months of the interest’s creation, and that
is the relevant period for federal gift tax purposes. The time
limit does not apply to a beneficiary who is under age 21.
A disclaimer is timely if made within nine months after the
beneficiary attains age 21. Some states do not impose a time
limit; the beneficiary may disclaim as long as the beneficiary
is not estopped from doing so.

Question 8

When the trust is disclaimed, how are creditors of the disclaimant treated?

Answer 8

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

Question 9

When is a trust purpose invalid?

Answer 9

Contrary to public policy
• Impossible to achieve
• Intended to defraud the settlor’s creditors or based on
illegal consideration
 - when it is illegal

Question 10

Who can serve as a trustee?

Answer 10

Anyone who has capacity to acquire and hold property
for their own benefit and has capacity to administer that
property may be a trustee. (Minors and insane persons can
hold property, but cannot administer.) State statutes limit the
right of some persons or corporations to serve as trustee (for
example, foreign corporations).

Question 11

What are the grounds to remove a trustee?

Answer 11

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 12

Is a writing needed for a trust?

Answer 12

Most states do not require a writing for a trust of
personal property. Oral trusts may be established
only 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.

Question 13

What is a secret trust?

Answer 13

In the case of a secret trust, the settlor agrees with a will
beneficiary that the beneficiary will hold the property in
trust for someone else—and relies on the beneficiary’s
promise—but the will does not state the trust nature
of the gift. The intended trust beneficiary 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 14

What is a discretionary trust?

Answer 14

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

Question 15

What is a spendthrift trust?

Answer 15

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. Although a spendthrift trust is a
restraint on alienation, most courts uphold spendthrift restrictions.

Question 16

How do you determine who the settlor is?

Answer 16

When it is unclear whether a beneficiary is the
settlor, determine who furnished the consideration
for the creation of the trust. If a person
furnishes the consideration, they are the settlor even though
the trust is created by another person.

Question 17

What is a support trust?

Answer 17

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 (see above).
*support trusts are not assignable.

Question 18

When is a trust terminated?

Answer 18

A trust will terminate automatically 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 19

What is the “Claflin” rule?

Answer 19

A trust also may be terminated or modified on the consent of
only all beneficiaries (that is, without consent of the settlor),
but only if no material purpose of the trust would thereby
be frustrated.

**Under the UTC - Note that under the UTC, a
court may modify a trust even without the consent of all of
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.

Question 20

When can a court modify or terminate a trust?

Answer 20

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 nonconsenting
beneficiaries will be adequately protected.

The court may also terminate a trust when?
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

Question 21

When can a trustee terminate a trust?

Answer 21

In some states, a trustee can terminate a trust if the trust
property is less than $50,000 and the amount is insufficient
to justify the cost of administration, as long as the trustee
provides the qualified beneficiaries with notice

Question 22

What is the remedy for the breach of trust of a trustee?

Answer 22

If a trustee commits a breach of trust, the trustee is liable to
the beneficiaries for the greater of:
• The amount necessary to restore the trust property and
distributions to what they would have been absent the
breach, or
• The trustee’s profit from the breach
A trustee is liable to a beneficiary for any profit arising from
administration of the trust, even if there was no breach.

Question 23

What are the remedies for when a trustee self-deals?

Answer 23

In the case of self-dealing, the beneficiary may have a choice
of the following remedies:
• Affirm the transaction if the trust profited
• Set aside the transaction if the trust lost money
• Trace profits from the trustee if the trustee profited

Question 24

What happens when a trust fails for lack of an ascertainable beneficiary?

Answer 24

A resulting trust in favor of the settlor or the settlor’s successors in interest is presumed.

Question 25

What is the Cy Pres doctrine?

Answer 25

Applies when a specific charitable purpose indicated by the settlor is no longer possible or practical, and the settlor manifested a general charitable intent. In such a case, the court can direct that the trust property be applied to another charitable purpose as close as possible to the original one, rather than permit the trust to fail and become a resulting trust.
Under the UTC application of Cy Pres is mandatory (absent express terms of the trust) and the testator’s charitable intent is presumed.