Trusts

Question 1

What Cannot be Trust Property/Corpus/Res?

Answer 1

• Mere expectations;
• Unearned profits;
• Debt owed by the trustee.

Question 2

Oral Trusts

Answer 2

Oral trusts are allowed, as long as they are inter vivos (not a will) and do not include real property (Statute of Frauds issue).

Question 3

Active Duties of a Trustee

Answer 3

Trustees must have active duties/know what to do with the trust. If they do not, it will be a “dry” trust, and the trustee must transfer title to the person holding equitable title, ending the trust via merger.

Courts are very lenient in construing trustee duties — even merely holding the property without doing anything to it could be a “duty”.

Question 4

Limits on Trust Duration

Answer 4

All private, non-charitable trusts must comply with the Rule Against Perpetuities.

Courts may apply the “Wait and See” Doctrine to see if the Rule Against Perpetuities will actually be violated, instead of predicting as such.

Question 5

Totten Trusts

Answer 5

An arrangement with a bank that allows the depositor to open a bank account in their own name for their beneficiaries to access upon the depositor’s death.

Not common modernly because of joint bank accounts.

Question 6

Common Trustee Duties, in General

Answer 6

• To collect, protect, and preserve trust property.
• To invest prudently.
• To exercise fairness to all beneficiaries.
• To administer the trust pursuant to the settler’s directions.
• To exercise fiduciary duties of loyalty and good faith.

Question 7

“Pour Over” Provision

Answer 7

“Pours” assets from the will into the trust, usually in the will’s residuary clause.

Considered “estate planning magic” because then you can change your trust however you’d like without having to keep changing your will.

Allowed under UTATA.

Question 8

Trust Purpose

Answer 8

Can be any purpose that is not illegal, fraudulent, or against public policy. (Examples: encouraging divorce or discouraging marriage)

When a trust purpose violates public policy, the court may delete the offending language or look from within the 4 corners of the trust to determine what the settlor actually wanted.

Question 9

Elements to Create a Trust

Answer 9

1. Settlor with requisite capacity + intent.
2. Delivery of trust property.
3. Ascertainable beneficiaries.
4. Active duties imposed on the trustee.
5. Proper trust purpose.
6. At least one trustee.

Question 10

Mandatory vs. Precatory Language

Answer 10

Mandatory — “Must”, “Shall”; creates a trust.
Precatory — “With the hopes that”; does not create a trust absent other circumstances.

Question 11

Rights of the Settlor After Creation

Answer 11

Once a trust has been created, the settler no longer owns the assets of the trust. If no valid trust is created, the property goes back to the settlor (a “resulting trust”).

Question 12

Charitable Trust

Answer 12

Cannot have ascertainable beneficiaries, unless they are a qualified charitable organization. Are not subject to the Rule Against Perpetuities.

Must have a charitable purpose — can be broad, as long as the trustee uses the trust exclusively for that objective.

If the charitable purpose is impossible or impracticable, a court may let the trust continue under the Cy Pres Doctrine.

Question 13

Resulting Trust

Answer 13

Created upon the failure to create an express trust when there has been an incomplete disposition of assets. Assets go back to the settlor.

Question 14

Cy Pres Doctrine

Answer 14

If the settlor’s exact charitable purpose cannot be met, the court may direct the application of the trust property to another charitable purpose similar to the settlor’s original intentions.

Question 15

Income vs. Remainder Beneficiary

Answer 15

Income: Entitled to the present rights and interests in the trust.
Remainder: Entitled to future interests; steps in after the natural termination of the preceding estate.

Question 16

Spendthrift

Answer 16

A provision that prevents the beneficiary from transferring the trust and prevents creditors from attacking it as well.

A spendthrift trust is effectively inalienable until the property is distributed to the beneficiary free of the trust.

Occasional exceptions/loopholes —
- Child support or alimony owed by the beneficiary;
- Government claims against the beneficiary;
- Provision of necessities to the beneficiary.

Question 17

Support Interest/Trust

Answer 17

Directs the trustee to provide only so much as is necessary for the beneficiaries support, and no other purpose. Support is measured according to the lifestyle to which the beneficiary is accustomed.

Question 18

Clafflin Doctrine

Answer 18

After the settlor dies, the trust cannot be terminated before the time specified by the settlor, even if all of the beneficiaries agree, if the material purpose of the trust has not bee accomplished.

Question 19

Termination by Settlor

Answer 19

Under the UTC, trusts are fully revocable or amendable unless the terms of the trust expressly provide to the contrary. A settlor may terminate an irrevocable trust only with the consent of all beneficiaries.

Question 20

Co-Trustees

Answer 20

Are considered joint tenants with a right of survivorship. The trust can override this by naming a successor trustee.

When co-trustees cannot reach a unanimous decision, they may act with a majority decision. A co-trustee may formally dissent to a decision to protect themselves from liability.

Question 21

Inter Vivors v. Testamentary Trust

Answer 21

Inter Vivos: Created during lifetime.
Testamentary: Created in a will, active upon death.

Question 22

Illusory Trusts

Answer 22

When the settlor retains overly broad powers over the trust, it is not actually a trust.

Question 23

Trust

Answer 23

The bifurcation of equitable and legal title.

A fiduciary relationship in which one party (the trustee) retains legal title over trust property for the benefit of the beneficiary, who holds equitable title.

Created by a “settlor”.

Question 24

Principal vs. Income

Answer 24

Principal: Amount originally received + capital gains, - debts and expenses.
- Sales proceeds and stock dividends are allocated to principal beneficiaries.

Income: All interest, receipts, dividends, and other income earned by the principal.
- Rents and cash dividends are allocated to income beneficiaries.

Question 25

HEMS Standard for Trustee Discretion

Answer 25

A trustee’s discretion is usually subject to the standard of maintaining and benefiting the beneficiaries’:
- Health,
- Education,
- Maintenence, and
- Support.

Question 26

Discretionary Trust/Interest

Answer 26

The trustee shall pay as much income as the trustee seems desirable. Not as alienable because everything is in the hands of the trustee, however, creditors cannot force a trustee to pay them if they would not be paying the beneficiary under the trustee’s discretion.

Question 27

Prudent Business Person Rule

Answer 27

The trustee must use the degree of skill, care, and prudence that would be reasonably used by a business person in their own personal affairs.

If the trustee is one with superior expertise and/or is a professional fiduciary, there may be a higher standard.

Trustee are shielded from liability for following instructions from the settlor, unless a reasonable person would realize that it was not prudent to do so.

Question 28

Trustee Powers

Answer 28

Powers are set forth in the trust instrument or derived from statute.

Unless expressly precluded, the trustee has the powers to:
- Settle/abandon trust claims,
- Borrow money,
- Sell or lease trust assets,
- Incur reasonable expenses (including buying insurance).

There is no right for the trustee to “invade the corpus”.

Decisions of a trustee are not subject to review by a court absent a showing of abuse of discretion.

Question 29

What Can be Trust Property?

Answer 29

Anything that is property, except mere expectations, unearned profits, or debt.

There must be some certainty over what the actual trust property is.

Question 30

Express vs. Implied Trusts

Answer 30

Express = Private and Charitable trusts. Created intentionally.
Implied = Created by law. Constructive and Resulting trusts.

Question 31

Reviewing Trustee Decisions

Answer 31

A trustee’s actions pertaining to matters within his discretion are NOT subject to review unless he abused his discretion.

A trustee’s exercise of discretion is usually reviewed under an objective standard (what was reasonable under the circumstances).

When the trustee has sole or absolute discretion under the trust instrument, his actions are reviewed under a good-faith standard.

Question 32

Prudent Investor Rule

Answer 32

Adopted in almost all jurisdictions by adopting the Uniform Prudent Investor Act.

Under this rule, a trustee is permitted to invest trust assets as would a prudent investor, considering both the interests of the life beneficiaries and the remaindermen.

Trustee must also seek to diversify investments so that all of the trust’s “eggs are not placed in one basket.”

Question 33

Impermissible Investments for a Trustee

Answer 33

Unsecured loans, “penny” stocks, and commodities futures.

Real estate ownership poses special risks, although investment in land is not prohibited under the PIR.

Question 34

Remedies for Trustee’s Breach of Duty

Answer 34

The court may:
- Compel the trustee to perform his duties;
- Enjoin the trustee from committing a breach of trust;
- Compel the trustee to pay money, restore property, or otherwise redress the breach.
- Order an accounting.
- Appoint a special fiduciary to take possession of the trust property.
- Suspend the trustee;
- Remove the trustee;
- Reduce or deny compensation to the trustee;
- Void an act of the trustee.

Question 35

When the Trustee Has Utilized Trust Funds for Their Own Purpose

Answer 35

The court can compel the trustee to convey to the trust any property that they obtained with the funds; or recover any profits made by the trustee with the money.

Where a trustee breaches the duty of loyalty intentionally, punitive damages may be recoverable, and may serve as a basis for removing him from his trusteeship.

Question 36

Trustee’s Liability to Beneficiaries

Answer 36

• Liable for any damages or losses resulting from improper investments or failure to take reasonable steps to make trust assets productive.
• Liable for any damages resulting OR gains resulting from a breach of loyalty.
• Liable for any lost interest or other income that would have been earned in the absence of failed duties.

Question 37

Exculpatory Clause

Answer 37

A provision in the trust instrument that relieves the trustee of liability for potentially wrongful acts. Trustee’s conduct that falls within the purview of that clause will be relieved of liability.

Cannot relieve a trustee’s liability for acts of bad faith, intentional misconduct, recklessness, or gross negligence.

Narrowly construed by the courts.

Question 38

Removal of a Trustee

Answer 38

A court may remove a trustee under the UTC if —
1. The trustee has committed a breach of trust;
2. There is a lack of cooperation among co-trustees;
3. Unfitness, unwillingness, or persistent failure to manage the trust; or
4. Substantial change in circumstances or the removal is requested by all beneficiaries.

Question 39

Trustee Liability to Third Parties

Answer 39

A trustee is not personally liable on a contract entered into in their trustee capacity when entered into in the course of administering the trust, and the trustee disclosed their fiduciary capacity.

Trustee has an implied right of reimbursement and indemnification against the trust when the contract was for the benefit of the trust and within their authority.

Personal liable for torts committed in the administering of a trust.