Trusts Flashcards
Definitions
UTC = Uniform Trust Code
UPC = Uniform Probate Code
UTATA = Uniform Testamentary Additions to Trusts Act
Valid Express Trust Formation
- definitive beneficiary
- settlor with capacity
- intent to create a trust
- a trustee
- valid trust purpose
- trust property; and
- compliance with state formalities
Trustee
A person cannot be the sole trustee and sole beneficiary
A court will appoint a trustee if one is not named in the instrument.
Beneficiary
Can be a person, corporations, or organizations
Precatory Language
Words such as “hope” or “request” that only express settlor’s desire, NOT intent, and do not create a valid trust or legal obligation.
Future Promises
A promise to create a trust in the future is unenforceable unless the promise is a valid contract.
Revocable & Irrevocable Trusts
Majority view/UTC > revocable by default unless trust states otherwise
Minority view > irrevocable by default unless the trust states otherwise
UTC adopted by 35+ states.
Testamentary Trust
Created by provisions in a settlor’s will. Does not take effect until settlor’s death.
Testamentary Trust Creation
- Will must state essential trust terms (beneficiaries, purpose, & trust property); AND
- intent must be found from either: (1) express terms of the will; or (2) by a document/writing incorporated by reference
Writing must have been in existence when the will was executed.
Pour-Over Provision in a Will
When a Will gifts property to a previously established inter vivos trust
Revocation/Termination of trust before death lapses the gift.
What is a charitable trust?
Confers a substantial benefit to society
Beneficiaries of a Charitable Trust
May be indefinite or a class of persons
Does the Rule Against Perpetuities apply to Charitable Trusts?
No.
Does the failure to state a specific purpose invalidate a charitable trust?
No. The court will select one.
Illusory Trust
When settlor retains significant control over the trust property. Are invalid (lack of intent to create).
Resulting Trust
Implied by law if a trust fails for lack of beneficiary.
Trust property returns to settlor’s estate.
Discretionary Trust
When a trustee has absolute discretion and power to determine when/how much trust property is distributed to beneficiaries, but this exercise must be in good faith.
Support Trust
Trust directs trustee to pay the beneficiary as much income as necessary for beneficiary’s support.
Pure Support Trust
Trustee has NO discretion in making payments.
Discretionary Support Trust
Trustee has discretion if the trust contains an ascertainable standard in which the beneficiary can bring an action compel payment in accordance with that standard.
How do Trust assets Pass?
According to the terms of the trust
If a testamentary trust/distribution fails, how does the trust property pass?
Trust property passes either (1) under a residuary clause in a will; or (2) to the settlor’s heirs by instestacy (if no residuary clause in a will).
Spendthrift Trust
Provision in a trust that prevents the transfer of a beneficiary’s interest in a trust
Valid only if restrains both voluntary and involuntary transfers
Spendthrift interest cannot be sold or assigned by income beneficiary.
When can a creditor reach a beneficiary’s spendthrift interest?
Only when:
1. judgment creditor who provided services for protection of the beneficiaries’ interest in the trust;
2. creditor who furnished necessities (some states only);
3. order for child support/alimony;
3. claim by state or federal government (taxes/other); or
4. self-settled trust (where settlor retains an interest, i.e., revocable trust)
If no exception applies, when can a creditor collect from a beneficiary of a spendthrift trust?
After payment is made to the beneficiary from the trust.
When can a creditor compel a trustee of a discretionary trust to make a distribution?
Never, even if the discretion is express in the standard of distribution or if the trustee abused its discretion.
Can a court order for child/spousal support be paid from a discretionary trust?
Yes. For unpaid child/spousal support, the court may:
1. order a distribution to satisfy the judgment; and
2. direct the trustee to pay the child, spouse, or former spouse.
Can a beneficiary invade the trust principal?
Yes, if the beneficiary will eventually receive the trust principal, a court may permit invasion unless it is (1) contrary to the settor’s intent or (2) adversely affects the other beneficiaries
Express/Implied Powers of Invasion of a Trust
A trustee CANNOT use trust property to pay income beneficiaries when trust income is insufficient unless there is an express or implied power of invasion (derived from settlor’s words or conduct).
Court may permit if it’s in best interest of beneficiaries/for support
Modification of a Trust
by the Settlor
Majority > when expressly reserved the power to modify or has power to revoke or amend
Minority > free to amend or revoke unless the trust states otherwise
UTC > may be modified:
1. by the settlor (unless trust states otherwise)
2. if settlor and beneficiaries consent
3. if beneficiaries consent + modification is not inconsistent with trust purpose
4. if it will further the trust purpose because of unanticipated circumstances
5. if cy pres doctrine applies
6. if the court determines the value is insufficient to justify administration + notice to all beneficiaries; or
7. necessary to conform the trust to settlor’s intent
Equitable Deviation Doctrine
Court may modify trust terms if:
1. continuing the trust is impractical or wasteful; and
2. the modification furthers the trust purpose because of unanticipated circumstances
Common Law > may only modify administrative provisions
UTC > dispositive provisions may be modified for unanticipated circumstances.
Additions Clause
Gives trustee power to accept/reject additions to trust property from settlor or any other person
UTC Termination of a Trust
- if revoked/expires pursuant to terms
- material purpose is achieved;
- becomes unlawful/contrary to public policy/or impossible to achieve
- settlor + all beneficiaries consent
- all beneficiaries consent + court decides continuance is not necessary to achieve trust purpose
- termination will further trust purpose because of unexpected circumstances
- cy pres doctrine applies; or
- value of trust insufficient to justify cost of administration
Distribution upon Termination
Trustee shall proceed expeditiously to distribute trust property (may retain reasonable reserve for trust’s expenses/debts/taxes)
If settlor/beneficiaries consent to trust termination, the beneficiaries may decide how to distribute trust property.
What conditions in trust/will provisions are VOID against public policy?
- prohibiting a first marriage; and/or
- requiring a divorce
Treated as if the restriction was not imposed unless remarriage OR
the purpose is to take care of a person’s daily needs until they are able to obtain such support through marriage
Trustee’s Duty to Administer
Must continue to administer until the trust terminates
Common law > must act with care, skill, and prudence
UTC > must administer in (1) good faith (2) in accordance with trust purpose/terms; and (3) in the interests of trust beneficiaries
*Trustee must exercise his powers in good faith and in accordance with terms/purpose even if trustee granted broad range of discretion.
Trustee’s Duty of Care
Duty of Prudent Administration > as prudent person would (reasonable care, skill, and caution)
Duty to Take Control & Protect Trust Property > must take reasonable steps to take control AND protect trust property
Trustee’s Duty of Loyalty
(as to self-dealing)
Must administer solely in interests of beneficiaries and cannot engage in self-dealing unless an exception applies.
If a trustee engages in impermissible self-dealing, what is the result?
- transaction is voidable by the affected beneficiary; or
- beneficiary can seek damages
5 exceptions to Trustee
self-dealing
- authorized by trust terms
- approved by the court
- beneficiary did not commence judicial proceeding in required amount of time
- beneficiary consented, ratified, or released trustee of liability
- transaction occurred before the person became a trustee
Trustee’s Duty of Loyalty
(as to conflict of interest)
Transaction presumed to be affected by conflict if entered into by: trustee’s spouse, descendants, siblings, parents, or their spouses, an agent or attorney of the trustee, or an entity that trustee has an interest in that might affect trustee’s best judgment
No Further Inquiry Rule
Transaction entered into by trustee for trustee’s own benefit automatically presumed to be a conflict, and is voidable without further inquiry (fairness and good faith is immaterial).
For a person who has a close business or personal relationship with trustee, the presumption is rebuttable if trustee shows transaction not affected by any conflict.
Duty of Loyalty
(to Act Impartially)
Must act impartially (when investing, managing, and distributing trust property) giving due regard to beneficiaries’ respective interests.
Cannot be influenced by personal favoritism or animosity.
Trustee’s Duty of Care
(to Test the Market)
Failure to test the market for potential buyers may result in breach of that duty of care.
Prudent Investor Rule
(Duty of Care)
Must exercise the degree of care, skill, and prudence of a reasonable investor investing his own property.
Must diversify assets, avoid risky investments, and keep trust assets productive (courts may look at the portfolio as a whole).
Exception for trust terms permitting risky investments.
Can a trustee delegate trust duties?
Yes, a trustee may delegate those duties and powers that a prudent trustee would delegate under the circumstances.
When delegating, a trustee must exercise reasonable care, skill, and caution in?
- selecting an agent;
- establishing scope/terms of the delegation; and
- monitor the agent’s performance and compliance
A trustee is not liable for an agent’s actions if the above requirements are followed.
Trustee acting in accordance with Settlor’s Wishes (in a revocable trust during settlor’s lifetime)
Trustee owes duties only to the settlor
Trustee is not liable for acting in accordance with the settlor’s wishes
Trustee acting in accordance with Settlor’s wishes (irrevocable trust)
Trustee owes duties to settlor AND beneficiaries
Trustee may be liable for acting is accordance with settlor’s wishes if it is to the exclusion of the beneficiaries.
Principal & Income Allocations by Trustee
State law normally controls how each is allocated
What should the trustee allocate to income?
- rental payments from real/personal property
- money received from entity (cash dividends/interest/investments); and
- ordinary expenses/repairs
What should the trustee allocate to principal?
- proceeds from sale of a principal asset
- all other property received (other than money from an entity). and
- extraordinary expenses/repairs
Wrongful invasion of trust assets by trustee
Trustee will be liable for:
1. amount required to restore the value of trust property/distribution; or
2. any profit made by trustee from the breach
When can a remainderman beneficiary receive trust property?
Not until termination of the trust
Representation of Remainderman
A minor, incapacitated, or unborn person may be represented by a person with a substantially identical interest UNLESS:
(1) already represented; or
(2) a conflict of interest exists
Do anti-lapse statutes apply to trusts?
In most states, no.
Substitute Takers in a Trust
A substitute gift is created in the deceased beneficiary’s surviving descendants if:
1. the beneficiary of a future interest does not survive the distribution date; AND
2. an anti-lapse statute applies
UPC > if the gift is not a class gift, a substitute gift is created in the surviving descendants
UPC > if the gift is a single generation class gift, a substitute gift is created in the surviving descendants of any deceased beneficiary
Vested Remainder in a Trust
An interest with no contingencies or conditions on survivorship pass to heirs if the person dies before interest become possessory and are devisable.
Common law > if a remainder person dies before a life tenant, a vested remainder interest will pass to the remainder person’s heirs. If no heirs, passes to the person’s estate. (Exception for survival provision in the trust)
Conditions on Survivorship for Vested Interests
Common law > a condition of survivorship on future interests in a trust is not implied
UPC > such condition is implied
Acceleration of Future Interests
May be accelerated (take possession immediately) if the present holder:
1. loses his legal right to the property; or
2. disclaims his interest (unless the distribution would harm a beneficiary/potential beneficiary or the trust terms limit acceleration)
Rule Against Perpetuities (RAP)
Common law > a gift must vest within a life in being at the time of the grant plus 21 years (invalidates a gift that will not actually vest or hypothetically vest in that time period)
When does a gift vest for purposes of RAP?
- the class closes; and
- all conditions for every member of the class are satisfied
Modern Modifications to RAP
- Wait and See Approach (some states) > to see if a gift actually vests with 21 years of death of a life in being at time the interest was created;
- Reduction of Age Contingencies (some states) > by statute, any age contingency that violates the rule is reduced to 21 years; or
- RAP abolished (some states) > have abolished the RAP by statute
What is Power of Appointment?
When a testator/settlor gives another person the power to decide where and to whom the property will go.
Donor = testator/settlor
Donee = person who has the power of appointment
General Power of Appointment
When donor leaves no conditions or restrictions for the appointment of property by donee
Testamentary Power of Appointment
Can only be exercised in donee’s will and according to donor’s conditions
Effectively exercising a power of appointment in an instrument
ONLY if:
1. instrument is valid under state law;
2. there’s an intent to exercise the power & it’s consistent with any conditions; and
3. the appointment is permissible (to a person/group authorized by the donor)
Exercise of Power in a General Residuary Clause
Most states > is not exercised unless a donee’s intent to exercise the power is referenced
UPC approach to Exercise of Power in Residuary Clause
Expresses intent to exercise power only if:
1. the will manifests intent to include property subject to the power; or
2. the power is a general power and the creating instrument does not contain a gift if the power is not exercised
Finding intent with a Blanket Exercise Clause
Most states > intent to exercise a power is presumed with a blanket exercise clause
Some states and UPC > if donor required the power to be exercised by an express/specific reference, a blanket exercise clause is not sufficient to show intent
Special Power of Appointment
Donee may appoint property ONLY to those limited persons/groups authorized by Donor.
Donee cannot appoint property to himself, his estate, his creditors, or his estate’s creditors.
Appointments to non-authorized persons/groups
are deemed ineffective.
If more than one appointment is made, the ineffective appointment will not affect other valid appointments.
Ineffective appointments pass to the taker-in-default. If no taker-in-default was designated by the donor, the property passes to the donee or donee’s estate.
