Trusts

Question 1

What are the main elements of a valid trust?

Answer 1

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

Question 2

What are the elements required for express trusts under the Uniform Trust Code (“UTC”)?

Answer 2

• A settlor with capacity to convey
• A present intent to create a trust relationship
• A competent trustee with duties
• A definite beneficiary
• The sole trustee is not the sole beneficiary
• A present disposition in trust of specific property then owned by settlor
• A valid trust purpose

Question 3

What is the required settlor capacity to make a trust?

Answer 3

For inter vivos, the capacity to make an inter vivos gift.

For testamentary, the capacity to make a will.

Question 4

Will a trust fail for lack of a specifically appointed trustee?

Answer 4

No; the court will appoint one if needed.

Question 5

Is a trust revocable?

Answer 5

There is a presumption of revocability for inter vivos trusts under the UTC; this applies unless the instrument expressly states otherwise.

Question 6

When may a trust be terminated?

Answer 6

• Settlor may terminate if all beneficiaries are in existence and agree to the termination
• Beneficiaries may terminate even an irrevocable trust if both the income beneficiaries and remaindermen unanimously consent, and there is no material purpose of the trust yet to be performed

Question 7

When can a precatory expression create a trust?

Answer 7

Normally, a settlor’s mere hope, wish, or suggestion that property be used in a certain way does not create a trust. However, it can when there exists. . .

• Definite and precise directions
• Directions addressed to a fiduciary (for example, executor under a will)
• A resulting “unnatural” disposition of property if no trust is imposed; or
• Extrinsic evidence demonstrating that the settlor previously supported the beneficiary

Question 8

When is a split of title sufficient?

Answer 8

Any split of legal and equitable title is sufficient so long as the sole trustee (holder of legal title) is not the sole beneficiary (holder of equitable title).

Question 9

Who is a qualified beneficiary?

Answer 9

• A current beneficiary
• First-line remainderman

Question 10

Is notice to a beneficiary required for the validity of a trust?

Answer 10

No. However, a lack thereof can indicate that no trust was intended.

Question 11

What is a discretionary trust?

Answer 11

Under a discretionary trust, the trustee has discretion to decide when to make a distribution to the beneficiary. No beneficiary or creditor can demand any part of the income or principle unless it is shown that the trustee acted dishonestly or in a state of mind “not contemplated” by the settlor.

Question 12

Under what circumstances is a trust purpose invalid?

Answer 12

A trust purpose is invalid when it is. . .

• Illegal
• Contrary to public policy (i.e., the purpose is to induce others to engage in criminal/tortious acts, encourage immorality, or induce one to neglect familial or civic duties)
• Impossible to achieve
• Intended to defraud the settlor’s creditors
• Based on illegal consideration

Question 13

What may a trustee pay under a support trust?

Answer 13

A trustee must pay what is necessary for the beneficiary’s support under a support trust. If the instrument is silent, the standard of support is the beneficiary’s accustomed standard of living.

*Note: A trust to “pay all of the income to A for his support” is NOT a support trust. “For his support” merely states the motive.

Question 14

What is a spendthrift trust?

Answer 14

A spendthrift trust restrains both the voluntary and involuntary transfer of the beneficiary’s interest. A creditor generally may not reach the beneficiary’s distribution prior to the beneficiary receiving it. However, there are exceptions for (1) a child or spousal support creditor, (2) a judgment creditor who has provided services for the protection of the beneficiary’s interest in the trust (like a lawyer, for example), (3) a claim of the state or the United States (normally tax related), or (4) creditors with claims for necessaries in some states (this is NOT recognized in UTC states).

Question 15

How is a charitable trust created?

Answer 15

A charitable trust may be created for a charitable purpose. It must have a large number of not readily identifiable individuals (other than a handful of identifiable ones). Charitable trusts are NOT subject to the common law rule against perpetuities.

Question 16

How may a charitable trust be terminated?

Answer 16

A charitable trust may terminate if the charitable purpose becomes unlawful, impracticable, or impossible to accomplish.

Question 17

When may a charity trust be modified under the doctrine of cy pres?

Answer 17

A charitable trust with a purpose which has become impracticable, unlawful, or impossible to achieve, may be modified under the common law (and UTC) doctrine of cy pres if. . .

• No alternative charity is named
• The settlor had general, rather than specific, charitable intent

If applied, cy pres allows for the trust to be modified or trust property to be distributes in a manner consistent with the settlor’s general intent.

Question 18

What is an honorary trust?

Answer 18

An honorary trust is one without a charitable purpose or definite beneficiary. It is often a trust to take care of a thing (like a cemetery plot) for a noncharitable purpose. Under the UTC, it is valid but not enforceable for more than 21 years. Under common law, it would not be valid if it violates the rule against perpetuities, but a court may allow the trustee to exercise the trust as a “power” for 21 years.

Question 19

What are the duties of a trustee?

Answer 19

• Duty of Loyalty (act in the best interest of the beneficiaries)
• Duty of Care (prudent administration)

Question 20

What is the Uniform Prudent Investor Act (UPIA)?

Answer 20

Almost all states have adopted a form of the UPIA. It states that a trustee must administer the trust as a prudent person would, using reasonable care, skill, and caution.

Question 21

What duties fall within the trustee duty of care?

Answer 21

• UPIA duty to administer the trust as a prudent person would, using reasonable care, skill, and caution
• Duty to diversify, under which the trustee is not liable for declines in value from general economic conditions, but is liable for failure to diversify absent directions to the contrary

Question 22

What are the remedies for a breach of trust?

Answer 22

• Suspending or removing a trustee
• Decreasing compensation
• Compelling a trustee to perform duties
• Compelling payment of damages
• Any other appropriate relief, as determined by a court
• In a self-dealing case, beneficiaries may rescind the transaction and ask for the purchase to be set aside, or for recovery of profits the trustee made from the breach

Question 23

What is a power of appointment?

Answer 23

The settlor may give the beneficiaries a power of appointment, which enables them to designate who will receive specific property.

Question 24

What is the difference between a general and special power of appointment?

Answer 24

A general power of appointment does not limit the class of people which beneficiaries may exercise a power of appointment in favor of. In most states, a general residuary clause is not sufficient to create such a power unless accompanied by a blanket exercise clause. In some states, however, the power is granted by general language (such as a general residuary clause) even if it makes no reference to the power of the instrument.

A special or limited power of appointment limits the class of people that the beneficiary can exercise the power in favor of. The UPC has a substantial compliance rule which says that if it can be shown that the power holder intended to exercise a power, a blanket exercise clause may be sufficient.

Question 25

What is the rule of convenience as related to class gifts?

Answer 25

When a gift is made to a group, the class closes when at least one member is entitled to distribution.

Question 26

What is the Uniform Probate Code (UPC) approach for class gifts?

Answer 26

Each living beneficiary takes their share, and the deceased beneficiary’s share will pass to surviving descendants (if none, the gift fails).

Question 27

What is the common law approach for class gifts?