Trusts Flashcards
What is the general rule for allocation between income and principal?
Priority: High
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.
What is the traditional approach for the allocation of assets between income and principal?
Priority: High
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.
(e.g., Income is rental payments, dividends and interest, and expenses and repairs; Principal is proceeds from sale, all other property other than money, and extraordinary expenses)
What is the modern (UPAIA) approach for the allocation of assets between income and principal?
Priority: High
Under the UPAIA/modern approach, 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.
How is a distribution of stock shares allocated under the modern approach?
Priority: High
A distribution of stock is treated as a distribution of principal under the UPAIA/modern approach.
What is a class gift, and when does a class close?
Priority: High
A gift to a group of individuals described collectively is a class gift.
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.
When does a vested remainder accelerate into possession?
Priority: Medium
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.
What happens to the trust principal if the income beneficiary of a trust disclaims their interest?
Priority: Medium
If the income beneficiary of a trust disclaims their 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
How is the disclaimant considered under the trust if they effectively disclaim their interest?
Priority: Low
When the holder of a future interest effectively disclaims that interest, the disclaimant is deemed to have predeceased the life tenant.
In a mandatory trust, what discretion does a trustee have with property distribution, and what rights does the beneficiary have?
Priority: High
Subject to the trust instrument, it is the beneficiary’s right to receive income or principal from the trust.
The trustee of a mandatory trust has no discretion regarding payments; instead, the trust document explains specifically and in detail how and when the trust property is to be distributed.
When does a discretionary trust exist?
Priority: High
If a trustee is given COMPLETE DISCRETION regarding whether to apply payments of income or principal to the beneficiary, then a discretionary trust exists.
When does a support trust exist?
Priority: Medium
If a trustee is to make payments to the beneficiaries of a trust AS IS NECESSARY FOR THEIR SUPPORT, then a support trust exists.
What is considered necessary in a support trust?
Priority: Medium
“Necessary” is not limited to bare essentials, and includes maintaining the standard of living to which the beneficiary is accustomed and always includes necessities and reasonable amounts for child support.
What is a trustee’s duty to administer?
Priority: High
The trustee has a duty to administer the trust in GOOD FAITH, in accordance WITH ITS TERMS AND PURPOSES, and in the INTEREST OF THE BENEFICIARIES.
This duty must be exercised even if the trust grants the trustee a broad range of discretion.
What is the duty to act impartially?
Priority: Medium
If a trust has two or more beneficiaries, the trustee MUST ACT IMPARTIALLY in investing, managing, and distributing the trust property.
A trustee cannot be influenced by their PERSONAL FAVORITISM OR ANIMOSITY toward individual beneficiaries when administering the trust.
What are the rights of a beneficiary’s creditors in a discretionary trust?
Priority: High
In a discretionary trust, if the trustee exercises his discretion to pay, then the beneficiary’s creditors have the same rights as the beneficiary, unless a spendthrift restrict exists.
What is a spendthrift trust?
Priority: High
A spendthrift trust expressly restricts the beneficiary’s power to voluntarily or involuntarily transfer their equitable interest.
Can a creditor reach a beneficiary’s trust interest if there is a spendthrift clause?
Priority: High
Generally, a beneficiary’s creditors cannot reach the beneficiary’s trust interest in satisfaction of their claims if the trust contains a spendthrift provision preventing creditors from reaching the interest.
When may a creditor reach a beneficiary’s interest even with a spendthrift clause?
Priority: High
Most states allow certain classes of creditors to reach a beneficiary’s interest even with a spendthrift clause.
Generally, this exception applies to (1) a judgment creditor who has provided services for the protection of a beneficiary’s interest in the trust; (2) an order for child support or alimony; (3) any claim by the state or federal government; or (4) a self-settled trust where the settlor retains an interest.
Some jurisdictions also recognize an exception for a creditor who furnishes necessities to the beneficiary.
