Trusts

Question 1

What is a trust?

Answer 1

A trust is a fiduciary relationship in which a trustee holds legal title to specific property under a fiduciary duty to manage, invest, safeguard, and administer the trust assets and income for the benefit of designated beneficiaries, who hold equitable title.

Question 2

What are a trustee’s fiduciary duties?

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

What are the two types of express trusts?

Answer 3

Express trusts are created by the express intention of the settlor. They fall into two categories distinguished primarily by the identity of their beneficiaries:

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

Question 4

What are the types of trust created by operation of law?

Answer 4

Resulting Trusts

• Resulting trusts arise from the presumed intention of the owner of the property.

Constructive Trusts

• Constructive trusts are an equitable remedy used to prevent unjust enrichment.

Question 5

What are the FIVE main elements of a valid trust?

Answer 5

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

Question 6

What are the elements of an express trust under the Uniform Trust Code (UTC)

Answer 6

The five elements required for an express trust are:

• (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 7

What are the specific rules surrounding the present intent requirement for an express trust?

Answer 7

• Communication of intent to the beneficiaries is not necessary; delivery of the property to the trustee is sufficient because acceptance of gifts is normally presumed.
• An intention to create a present trust must have been externally manifested by the settlor at the time they owned property and prior to its conveyance to another.
• The settlor’s intent must be that the trust take effect immediately, not at some future time—although a future interest can be trust property.

Question 8

What is required for a split of title necessary to sustain a trust?

Answer 8

Any split of title is sufficient so long as the sole trustee is not the sole beneficiary.

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

Question 9

What is required to have an identifiable trust corpus (property)?

Answer 9

Where there is no trust property, the trust fails because the trustee has no property to manage.

The trust property must be an existing interest in existing property. The trust res must be existing property that the settlor has the power to convey.

The res must be identifiable and segregated, but the res may be a fractional or undivided interest in specific property.

Question 10

What is required to have a beneficiary in a trust?

Answer 10

A trust cannot exist without someone to enforce it. Thus, an ascertainable beneficiary is necessary to the validity of every trust except charitable and honorary trusts.

Beneficiaries must be ascertainable by the time their interests are to come into enjoyment.

Question 11

Who is a qualified beneficiary?

Answer 11

A qualified beneficiary is a beneficiary who, on the date the beneficiary’s qualification is determined, is:

• (1) a current beneficiary, or
• (2) a first-line remainderman (that is, one who would become eligible to receive distributions were the event triggering the termination of a beneficiary’s interest or of the trust itself to occur on the qualification date).

Question 12

What notice to and acceptance by the beneficiary is required to create a trust?

Answer 12

Notice to a beneficiary is not essential to the validity of a trust. Lack of such notice may indicate, however, that no trust was intended.

Acceptance by the beneficiary is required, but can take place after a valid trust is created. Acceptance may be express or implied and is generally presumed.

Question 13

Can a beneficiary disclaim the benefit of a trust?

Answer 13

Under the law of most states, a beneficiary may disclaim an interest by filing a written instrument with the trustee (or, if a trust created by will is involved, with the probate court).

If a valid disclaimer is made, the trust is read as though the disclaimant was deceased as of the relevant date.

A beneficiary may be estopped from making a disclaimer if they have exercised any dominion or control over the interest or accepted any benefits under the trust.

Question 14

What is required to create a trust in favor of a class of beneficiaries?

Answer 14

Beneficiaries may be unascertainable when the trust is created as long as they are ascertainable when they are to benefit.

The trustee must be able to determine who belongs to the class.

• At common law, if a private trust exists for the benefit of a class, the class must be reasonably definite.
• Under the UTC, a settlor may empower the trustee to select the beneficiaries from an indefinite class. Failure to exercise the power gives rise to a resulting trust in favor of the settlor or their successors.

Question 15

What happens if a trust fails for lack of a beneficiary?

Answer 15

If a trust fails for lack of a beneficiary (for example, because the beneficiaries are not ascertainable), a resulting trust in favor of the settlor or their successors is presumed.

Question 16

What are invalid trust purposes?

Answer 16

• Illegal
• Contrary to public policy
• Impossible to achieve
• Intended to defraud the settlor’s creditors or based on illegal consideration

Question 17

Will a trust fail for lack of a trustee?

Answer 17

Once established, a trust will not fail because the trustee dies, refuses to accept appointment, or resigns.

The court will appoint a successor trustee unless it is clear that the settlor intended the trust to continue only so long as a particular trustee served.

Question 18

How does a trustee accept a trusteeship?

Answer 18

A person accepts a trusteeship by:

• (1) signing the trust or a separate written acceptance;
• (2) substantially complying with the acceptance terms in the trust instrument; or
• (3) accepting delivery of trust property, exercising powers or performing duties as trustee, or indicating acceptance.

Question 19

When can a trustee be removed?

Answer 19

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 20

How can a trustee resign?

Answer 20

Under the UTC, once an appointment has been accepted, the trustee can resign by either:

• (1) giving 30 days’ notice to the qualified beneficiaries, settlor (if living), and co-trustees; or
• (2) obtaining court approval.

Question 21

How is an inter vivos trust created?

Answer 21

Inter vivos trusts are created while the settlor is alive either by the settlor declaring themself trustee for another or by the transfer of property to another as trustee.

The present intent required must be manifested by conduct (delivery) or words (declaring oneself trustee).

If a present trust is not established because there is no trust res, the trust arises when the settlor subsequently acquires the res and remanifests trust intent.

Question 22

What type of transfer of property is required for an inter vivos trust?

Answer 22

Declaration of Trust

• If a trust was created by a declaration of trust, no conveyance of personal property is needed as long as the property is identified and segregated.
• Real property should be conveyed from the settlor as an individual to the settlor as a trustee.

Conveyance in Trust

• If the trust was created by a conveyance in trust, the settlor must convey the property to the trustee.
• Real property is conveyed by deed.
• Personal property is conveyed by physical delivery or an appropriate written assignment.
• Delivery means placing the trust property out of the settlor’s control.

Question 23

When does the statute of frauds require a writing for a trust?

Answer 23

Writing Required for Trusts of Land

• 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 24

What is a pour-over gift to a trust?

Answer 24

When the settlor makes 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.

The trust may remain unfunded during the settlor’s lifetime. The pour-over property can be the initial trust funding if:

• The trust is identified in the will, and
• The trust is executed before the testator’s death

Question 25

What rights does a beneficiary have to transfer his interest in a trust?

Answer 25

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.

Unless statute or the trust provides otherwise, the beneficiary’s creditors may reach the beneficiary’s interest in the trust. The interest is subject to judicial sale.

Question 26

What is a discretionary trust?

Answer 26

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 27

What are the rights of beneficiaries and creditors to beneficiaries in regards to a discretionary trust?

Answer 27

The beneficiary has no right to payment that they can enforce against the trustee. Thus, the beneficiary cannot interfere with the exercise of the trustee’s discretion unless the trustee abuses their power, in which case the court will intervene.

Before the trustee exercises their discretion to make payments to the beneficiary, the beneficiary’s interest is not assignable and cannot be reached by their creditors.

Creditors are usually allowed to attach the beneficiary’s interest but may not compel the trustee to make a distribution. If the trustee has notice of an attachment by creditors and decides to make payments to the beneficiary, the trustee must make those payments directly to the creditors unless the beneficiary’s interest is protected by a spendthrift provision.

Question 28

What is a spendthrift trust?

Answer 28

Beneficiary May Not Transfer Interest

• The beneficiary may not transfer their interest.
  
  • As such, attempted assignments are unenforceable
• However, once the trustee pays the beneficiary, the beneficiary may transfer the property received.

Creditors Cannot Attach Beneficiary’s Interest

• The beneficiary’s creditors cannot reach the beneficiary’s trust interest until income or principal has been paid to the beneficiary. Of course, once the trustee pays the beneficiary, the creditors may reach the property.

Question 29

What limitations are imposed on spendthrift trusts?

Answer 29

In most states, a settlor cannot use a spendthrift trust to protect their own property from their own creditors.

Typically, a spendthrift clause cannot be used to shield the beneficiary from:

• Judgments or court orders for support or maintenance of the beneficiary’s child, spouse, or former spouse
• Claims by the government

Question 30

What is a support trust?

Answer 30

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.

Even without a spendthrift clause, the beneficiary’s interest in a support trust is such that no one but the beneficiary can enjoy it; the beneficiary’s interest is not assignable by definition.

Question 31

When can a settlor modify the terms of a trust?

Answer 31

UTC – a settlor can revoke or amend a trust unless the terms expressly state that it is irrevocable.

Traditional rule – a trust is irrevocable unless the settlor expressly reserves the power to revoke or modify the trust.

Under the law of some states, the settlor may revoke an irrevocable trust upon written consent of all living persons with vested or contingent interests

Question 32

When can beneficiaries of a trust terminate or modify a trust?

Answer 32

With Settlor’s Consent

• A trust may be terminated or modified upon the consent of the settlor (or the settlor’s agent, conservator, or guardian) and all beneficiaries, even if the modification or termination conflicts with a material purpose of the trust.

Without Settlor’s Consent

• 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 (“Claflin Rule”).
• 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 33

What provisions in a trust are likely to prevent the beneficiaries from modifying or terminating as they are considered material purposes?

Answer 33

• Support of beneficiary
• Spendthrift provision
• Payment at certain ages
• Payment at certain dates
• Discretionary trust