Trusts Flashcards
Allocation of Income and Principal
All assets received by a trustee must be allocated to either income or principal. The allocation must be balanced so as to treat present and future trust beneficiaries fairly, unless a different treatment is authorized by the trust instrument. The traditional approach assumed that any money generated by trust property was income and that any money generated in connection with a conveyance of trust property was principal. The traditional approach serves as the starting point for the modern approach. Under the UPAIA, a trustee is empowered to re-characterize items and reallocate investment returns as he deems necessary to fulfill the trust purposes, as long as his allocations are reasonable and are in keeping with the trust instrument. A distribution of stock is treated as a distribution of principal under the UPAIA.
Class gifts
A gift to a group of individuals with an automatic right of survivorship is a class gift. A class remains open and may admit new members until at least one class member is entitled to obtain possession of the gift or the preceding interest terminates.
Disclaimer
A vested remainder accelerates into possession as soon as the preceding estate ends for any reason, such as the disclaiming of the estate by its holder. If the income beneficiary of a trust disclaims her interest, then the trust principal becomes immediately distributable to the presumptive remainder beneficiaries of the trust, provided no one would be harmed by making a distribution to them earlier than it would have been made had the income beneficiary not disclaimed.
Almost all states have enacted statutes that permit beneficiaries of trusts to disclaim their interest in the trust property. The state statute here requires that a disclaimer be made within nine months of the testator’s death. When the holder of a future interest effectively disclaims that interest, the disclaimant is deemed to have predeceased the life tenant.
When can a restraint on marriage be upheld?
A trust can be created for any purpose, as long as it is not illegal, restricted by rule of law or statute, or
contrary to public policy. Trust provisions that restrain a first marriage have generally been held to
violate public policy. However, a restraint on marriage might be upheld if the trustee’s motive was
merely to provide support for a beneficiary while the beneficiary is single.
Duty of Loyalty: Self Dealing
A trustee is bound by a broad range of fiduciary duties, including a duty of loyalty. When a trustee
personally engages in a transaction involving the trust property, a conflict of interest arises between the
trustee’s duties to the beneficiaries and her own personal interest. A trustee buying or selling trust
assets is considered self-dealing, even if the transaction occurred at fair market value. When selfdealing is established, an irrebuttable presumption is created that the trustee breached the duty of
loyalty. No further inquiry into the trustee’s reasonableness or good faith will be required, because selfdealing is a per se breach of the duty of loyalty. When the duty of loyalty is breached, any beneficiary
has standing against the trustee if his interests are violated, and he can choose either to set aside the
transaction or to ratify the transaction and recover any profits therefrom.
Duty of Prudence (Care): Investments
The Uniform Prudent Investor Act (the “UPIA”) requires the trustee to act as a prudent investor would when investing his own property.
The trustee must exercise reasonable care, caution, and skill when investing and managing trust assets unless the trustee has special skills or expertise, in which case he has a duty to utilize such assets.
Determinations of compliance under the UPIA are made with reference to the facts and circumstances as they existed at the time the action was made, and they do not utilize hindsight.
Part of being prudent is taking care to make informed decisions regarding the investment scheme and/or delegating such decision-making to an expert.
In assessing whether a trustee has breached this duty, the UPIA requires consideration of numerous factors, including (i) the distribution requirements of the trust, (ii) the general economic conditions, (iii) the role that the investment plays in relationship to the trust’s overall investment portfolio, and (iv) the trust’s need for liquidity, regularity of income, and preservation or appreciation of capital.
Although the trustee must adequately diversify the
trust investments to spread the risk of loss, investing in one mutual fund may be sufficient if the fund is
sufficiently diversified.
Support Trust
If a trustee is to make payments to the beneficiaries of the trust as is necessary for their support, then a support trust exists. In this context, “necessary” is not limited to bare essentials, but rather includes maintaining the standard of living to which the beneficiary is accustomed, as well as support for the beneficiary’s spouse and children
Discretionary Trust
If a trustee is given complete discretion regarding whether to apply payments of income or principal to the beneficiary, then a discretionary trust exists.
Duty to Administer
The trustee of a discretionary trust nevertheless has a duty to administer the trust in good faith, in accordance with its terms and purposes, and in the interest of the beneficiaries.
Duty to be Impartial
In addition, the trustee had a duty to be impartial in dealing with the beneficiaries of a trust, including not to be influenced by the trustee’s personal favoritism or animosity.
Spendthrift Trust
A spendthrift trust expressly restricts the beneficiary’s power to voluntarily or involuntarily transfer his equitable interest.
The spendthrift restriction applies only as long as the property remains in the trust, and it is inapplicable after it has been paid out to the beneficiary.
A beneficiary’s creditors usually cannot reach the beneficiary’s trust interest in satisfaction of their claims if the governing instrument contains a spendthrift clause prohibiting a beneficiary’s creditors from attaching the beneficiary’s interest.
However, most states allow certain classes of creditors to reach a beneficiary’s interest, notwithstanding the spendthrift clause. Some states also recognize an exception for a provider of necessities to the beneficiary.
Modification: Unanticipated Events
A court may modify a trust if events that were unanticipated by the settlor have occurred and the changes would further the purposes of the trust. To the extent possible, the modification must be made in accordance with the settlor’s probable intention, and the court need not seek beneficiary consent to make the modification.
Modification: Ineffective or Uneconomic
Even if circumstances have not changed in an unanticipated manner, a court may modify the terms of a trust that relate to the management of trust property if continuing the trust on its existing terms would be ineffective or uneconomic.
Cy pres doctrine
In an effort to carry out the testator’s intent, under the cy pres doctrine, a court may modify a charitable trust to seek an alternative charitable purpose if the original charitable purpose becomes illegal, impracticable, or impossible to perform. The settlor’s intent controls. If it appears that the settlor would not have wished that an alternative charitable purpose be selected, the trust property may instead be subject to a resulting trust for the benefit of the settlor’s estate. The Uniform Trust Code and the Restatement (Third) both presume a general charitable purpose and authorize applying cy pres even if the settlor’s intent is not known.
Termination of Trust by Consent of all Beneficiaries
A trust may terminate by consent if all beneficiaries and the trustee consent to the termination. Under the Claflin doctrine, a trustee can block a premature trust termination—even one to which all beneficiaries have consented—if the trust is shown to have an unfulfilled material purpose. Most courts allow the trustee to block the termination if it can be shown that termination would violate the settlor’s intent.
