Trusts

Question 1

Formation of a Trust

Answer 1

(1) a settlor or trustor who creates the trust,
(3) a trustee, whose duty it is to manage the trust,
(4) intent to create trust,
(5) trust property (res),
(5) delivery of trust property to trustee,
(6) beneficiaries, and
(7) a valid trust purpose.

Question 2

Types of Trusts

Answer 2

(1) Secret
(2) Semi-Secret
(3) Charitable
(4) Cy Pres
(5) Spendthrift
(6) Discretionary
(7) Support

Question 3

Secret Trusts

Answer 3

If a will
(1) makes a gift that’s absolute on its face to a named B (secret trustee) AND
(2) in reliance on named secret trustee’s promise to hold property in trust for another, then
(3) courts allow extrinsic evidence - MUST show by clear and convincing evidence.

Result is a constructive trust on the trustee.

Question 4

Semi-Secret Trusts

Answer 4

Will makes a gift that’s explicitly in trust but fails to name
(1) the actual B, and/or
(2) purpose of trust.

Question 5

Result of Semi-Secret Trust

Answer 5

Trust Fails - the named trustee holds the property as resulting trustee in favor of T’s heirs, and property falls into residuary, or if none, to intestacy.

Question 6

Charitable Trusts

Answer 6

Trust intended to benefit public.

Question 7

Cy Pres

Answer 7

Where trustor had charitable intent, but specified charitable use is no longer possible or practical, court must decide whether trustor had
(1) specific charitable intent so trust fails, or
(2) general charitable intent so devoted to a similar use close to original use.

Question 8

Spendthrift Trusts

Answer 8

B cannot alienate interest in trust and creditor cannot compel trustee to pay.

Once trustee pays/distributes assets to beneficiary, creditor can try to come after assets

Question 9

Spendthrift Exceptions

Answer 9

Certain creditors can compel payment by trustee:
(1) claims of dependents (spousal/child support),
(2) gov’t claims (taxes), and
(3) suppliers of necessities (food/housing/medicine).

Question 10

Discretionary Trusts

Answer 10

Trustee has complete discretion on whether to pay or withhold

If trustee has notice of attachment, must pay creditors

Question 11

Support Trusts

Answer 11

Trustee is required to pay only so much as necessary for the support of the beneficiary

Limited amount only

Non assignable

Question 12

Beneficiary Termination

Answer 12

Revocable/modifiable if
(1) all beneficiaries consent (including remote and contingent Bs), and
(2) modification/termination will not interfere with a material purpose of trust.

Question 13

Failure of Express Trust

Answer 13

When express trust fails because B is dead, equity creates resulting trust in settlor (or if dead, settlor’s estate)

Question 14

Fiduciary Duties of Trustee

Answer 14

DEC PP LIAA
(1) Delegation
(2) Earmark
(3) Care
(4) Prudence/Diversify
(5) Productive Property
(6) Loyalty
(7) Impartiality
(8) Allocate Income & Expenses
(9) Administer Trust According to Terms

Question 15

Duty to Delegate

Answer 15

Trustee may delegate management functions that a prudent trustee would delegate, and must exercise reasonable care, skill, and caution in
(1) selecting an agent,
(2) establishing the scope and terms of the delegation, and
(3) periodically reviewing the agent’s actions.

Trustee responsible even if delegate is co-trustee

Question 16

Duty to Earmark

Answer 16

Trustee must keep trust assets separate from personal assets and property, and
assets must be titled in the name of trustee as trustee.

(“T as trustee of ABC trust.”)

Question 17

Duty of Care

Answer 17

Prudent Investor & Skill, Care and Caution

Skill: Capabilities
Care: Diligence & Efforts (includes duty to investigate)
Caution: Conservatism in managing trust.

Question 18

Duty of Prudence/To Diversify

Answer 18

Make prudent investments, which requires diversification and placing trust assets into investments that will maximize the value of trust assets

Question 19

Duty to Make Property Productive

Answer 19

The trustee has a duty to make property productive

Question 20

Duty of Loyalty

Answer 20

Trustee cannot purchase trust property for the trustee’s own accounting or that of related persons without FIRST obtaining court approval.

Question 21

Duty to Act Impartially

Answer 21

Trustee has a duty to act impartially toward both the income and principal beneficiaries.

Trustee CANNOT choose investments that largely favor income over the growing value of the trust corpus

ALSO APPLIES TO ALLOCATION.

Question 22

Duty to Allocate Income

Answer 22

(1) money -> income UNLESS capital gain or in distribution of liquidation of an entity;

(2) insurance proceeds -> principal, EXCEPT business income loss allocated to income;

(3) proceeds from patents, copyrights, oil and gas royalties and lease payments, and similar payments are allocated 10% to income and 90% to principal.

Stock Dividends -> Principal

Question 23

Duty to Allocate Expenses

Answer 23

Professional Compensation -> allocated evenly

Ordinary -> Income

Debt, Tax, Enviro matters -> Principal

Question 24

Duty to Administer Trust According to Terms

Answer 24

Follow trust instructions.

Question 25

Remedies for Breach of Fiduciary Duty

Answer 25

Trustee is liable for all losses resulting from breach

A gain from one breach cannot offset a loss from another - trustee liable for entire amount of loss.

Trustee can also be removed as trustee.