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MEE (V) > Trusts > Flashcards

Trusts Flashcards

1
Q

define: trust

A

fiduciary relationship wherein one or more trustees are called upon to manage, protect, and invest certain property and any income generated therefrom for the benefit of one or more named beneficiaries.

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2
Q

three main types of trusts

A

express trusts, resulting trusts, constructive trusts

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3
Q

trusts interests are

A

alienable, devisable, descendible unless terms of trust expressly or impliedly provide otherwise

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4
Q

trust is valid so long as it has…

A

a trustee, an ascertainable beneficiary, assets

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5
Q

is consideration required?

A

no

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6
Q

traditional vs. UTC approach: revocability of trusts

A

traditional: irrevocable unless otherwise stated
UTC: revocable unless otherwise stated

Majority now follows UTC

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7
Q

mandatory vs discretionary trusts

A

A mandatory trust requires the trustee to distribute all trust income.

To protect the interests of the beneficiaries, a settlor may instead opt to create a discretionary trust, under which the trustee is given the power to distribute income at his discretion.

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8
Q

what is bifurcated?

A

Title –

legal title goes to trustee
equitable title goes to beneficiary

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9
Q

can someone by sole trustee and sole beneficiary?

A

No, this arrangement lacks enforcement power

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10
Q

Named trustee: what qualifications?

A

Must have the capacity to acquire and hold property for his own benefit and the capacity to administer the trust

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11
Q

acceptance of trusteeship

A

i) By substantially complying with a method of acceptance provided for in the terms of the trust; or

ii) If the terms of the trust do not provide a method of acceptance, or the method is not made exclusive, by accepting delivery of the trust property, exercising powers as a trustee, performing duties as a trustee, or otherwise indicating acceptance of the trusteeship.

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12
Q

will trust terminate automatically upon death of trustee?

A

No, court will appoint a successor trustee, unless settlor expressed contrary intent

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13
Q

effect of failing to name a trustee

A

court will appoint

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14
Q

express trust definition

A

created as a result of the expressed intention of the owner of the property to create a trust relationship with respect to the property

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15
Q

two categories of express trusts

A

private, charitable

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16
Q

private express trust created only if:

A

1) settlor has CAPACITY to create trust
2) clearly expresses PRESENT INTENT to transfer ownership of
3) PROPERTY to
4) a TRUSTEE who has duties to perform
5) for the benefit of one or more definite or ascertainable BENEFICIARIES
6) for a VALID PURPOSE

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17
Q

does settlor’s intent to create trust have to be written?

A

No, could be orally, in writing, or by conduct

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18
Q

trust property requirements

A

must be identifiable, trust property must be identifiable and segregated

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19
Q

valid trust purpose

A

anything that is not illegal, restricted by rule of law or statute, contrary to public policy, and is possible to achieve

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20
Q

elements of a valid private express trust

A

1) intent
2) trust property
3) valid trust purpose
4) ascertainable beneficiaries

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21
Q

exceptions to ascertainable beneficiaries requirement of private trust

A

unborn children, class-gift exception, charitable trusts exception

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22
Q

2 types of express trusts

A

inter vivos, testamentary

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23
Q

for a charitable trust to be valid, it must have

A

1) stated charitable purpose
2) must exist for the benefit of the community at large or for a class of persons the membership in which varies

[construed liberally by courts]

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24
Q

cy pres

A

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

Will consider settlor’s primary purpose. if no cy president then apply resulting trust

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25
Q

two types of remedial trusts

A

resulting trust, constructive trust

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26
Q

what is a resulting trust

A

When a trust fails in some way or when there is an incomplete disposition of trust property, a court may create a resulting trust requiring the holder of the property to return it to the settlor or to the settlor’s estate.

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27
Q

aim of resulting trust

A

prevention of unjust enrichment

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28
Q

constructive trust

A

it would be wrong for the party holding title to the property to keep it

e.g. one individual commits homicide and benefits from victim’s estate

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29
Q

how to secure a constructive trust?

A

P seeking constructive trust must establish that

1) defendant holds title to the property to be subject to the constructive trust
2) d’s retention of the property would unjustly enrich the defendant

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30
Q

effect of constructive trust

A

plaintiff acquires the property itself

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31
Q

defenses to claim seeking constructive trust

A

1) unclean hands
2) laches

32
Q

effect of gift over clause

A

jx mixed as to the treatment of such clauses but many will honour before imposing equitable remedy

33
Q

alienability of beneficiary’s equitable interest

A

freely alienable unless a statute or the trust instrument limits this right.

34
Q

support trust def

A

A support trust directs the trustee to use his discretion to pay income or principal as necessary to support the trust beneficiary

35
Q

can creditors reach the assets of a support trust?

A

no, to the extent that a provider of a necessity to the beneficiary can be paid directly by the trustee

(trustee pays my tuition straight to the school)

36
Q

standing of beneficiary of fully discretionary trust to sue

A

clear abuse of discretion by trustee

37
Q

define: discretionary trust

A

trustee has complete discretion regarding whether or not to apply payments of income or principal to the beneficiary

38
Q

mandatory trust

A

trustee has no discretion re: payments. trust doc explain specifically how the trust property is to be distributed

39
Q

spendthrift trust

A

expressly restricts the beneficiary’s power to voluntarily or involuntarily transfer his equitable interest (is a restraint on alienation)

40
Q

these classes of creditors can access beneficiary’s interests even in spendthrift trusts

A

1) children, spouses entitled to support
2) orders of federal or state tax liens

NOT bankruptcy

41
Q

methods of revocability

A

i) By substantial compliance with a method provided in terms of the trust; or

ii) If the terms of the trust do not provide a method or the method provided is not expressly made exclusive, by;

a) A later will or codicil that expressly refers to the trust or specifically devises property that otherwise would have passed according to the terms of the trust; or

b) Any other method manifesting clear and convincing evidence of the settlor’s intent.

42
Q

modification or termination by beneficiaries – how? (no material purpose violation)

A

1) consent of ALL beneficiaries
2) continuance not necessary to achieve any material purpose of the trust and that modification is not inconsistent with a material purpose of the trust

43
Q

modification or termination of a trust by all beneficiaries and settlor (material purpose violation)

A

A noncharitable irrevocable trust may be modified or terminated by the consent of all beneficiaries and the settlor even though the modification or termination is inconsistent with a material purpose of the trust.

44
Q

what are the reasons a court may modify/terminate a trust

A

unanticipated changes, inability to administer the trust effectively, trust is uneconomic

Court may modify to correct mistakes or achieve settlor’s tax objectives

45
Q

if court is modifying/reforming/terminating a trust, do they need consent from beneficiaries?

A

No, but B or T may commence a proceeding to approve or disapprove such changes

46
Q

allocating principal and income: traditional approach vs. modern approach

A

money generated by trust property was income, money generated by conveyance of trust property was principal (traditional)

vs.

focus on total return, trustee empowered to re-characterize items and reallocate investment returns as he deems necessary to fulfill the trust purposes

47
Q

under modern approach for principal vs. income, what factors must trustee balance in determining allocation?

A

i) The intent of the settlor and the language of the trust instrument;

ii) The nature, likely duration, and purpose of the trust;

iii) The identities and circumstances of the beneficiaries;

iv) The relative needs for regularity of income, preservation and appreciation of capital, and liquidity;

v) The net amount allocated to income under other sections of the act and the increase and decrease in the value of principal assets;

vi) The anticipated effect of economic conditions on income and principal; and

vii) The anticipated tax consequences of the adjustment.

48
Q

unitrust

A

Under a unitrust, the distinction between income and principal is not relevant because the lifetime beneficiaries are entitled to a fixed annual share of the value of the trust principal.

49
Q

trustee duties: after trustee accepts, trustee is charged w/

A

safeguarding the trust property by purchasing insurance, earmarking assets, recording deeds, identifying and locating beneficiaries, and following the settlor’s instructions. The trustee acts as a fiduciary, and, in most cases, his powers are not personal but rather attach to his office.

50
Q

granting powers: modern trend

A

The modern trend is for the court to grant the trustee all those powers necessary to act as a reasonably prudent person in managing the trust.

51
Q

common trustee powers

A

power to revoke (when settler names self as trustee), power to withdraw, power to modify

trustee can petition court to obtain powers not expressly authorized in the trust: power to sell or contract

52
Q

trustee duties (and objective/subjective)

A

loyalty (objective standard), good faith (subjective)

duty of prudence

inform and account

duty of prudent administration

53
Q

what happens when trustee self deals?

A

When self-dealing is an issue, an irrebuttable presumption is created that the trustee breached the duty of loyalty.

54
Q

examples of self dealing

A

i) Buying or selling trust assets (even at fair market value);

ii) Selling property of one trust to another trust that the trustee manages;

iii) Borrowing from or making loans to the trust;

iv) Using trust assets to secure a personal loan;

v) Engaging in prohibited transactions with friends or relatives; or

vi) Otherwise acting for personal gain through the trustee position.

55
Q

what result when self dealing occurs but is authorized by terms of trust, by court order, or by all beneficiaries?

A

transaction must still be reasonable and fair

56
Q

Conflicts of interest that aren’t self dealing – what result?

A

reasonable and in good faith standard

57
Q

duty of prudence – common law vs. modern law approach

A

common law: trustee could not delegate bc doing so would be contrary to settlor’s intent

modern law: trustee may delegate if it would be unreasonable for the settlor to require the trustee to perform such tasks

58
Q

test for whether function is delegable by trustee

A

if function goes to heart of trust or constitutes a critical function concerning the property

59
Q

what trust instruments can trustee invest in?

A

old way: approved list
model prudent man investment act: any investment a prudent man would make, barring only speculative investemnts
uniform prudent investor act: invest as if own property, puts less emphasis on risk for each investment

60
Q

modern portfolio approach

A

high risk investment can be offset by lower risk investment

61
Q

trustee duty to be impartial

A

A trustee has a duty to be impartial in dealing with the beneficiaries of a trust.

Impartiality does not require that the trustee treat each beneficiary equally, but it does require a trustee not to be influenced by the trustee’s personal favoritism or animosity toward individual beneficiaries in administering the trust.

If a fact pattern indicates that either (i) the trust principal is appreciating but not generating a reasonable stream of income, or (ii) the trust is producing a good amount of income but the principal is depreciating, then your analysis should center on the duty of impartiality. In these situations, the trustee may be favoring one class of beneficiaries over the other.

62
Q

what is trustee’s duty to disclose?

A

A trustee must disclose to the beneficiaries complete and accurate information about the nature and extent of the trust property, including allowing access to trust records and accounts.

The trustee must also identify possible breaches of trust and promptly disclose such information to the beneficiaries.

63
Q

what is trustee’s duty to account?

A

A trustee must periodically account for actions taken on behalf of the trust so that his performance can be assessed against the terms of the trust. Trustees of testamentary trusts must account to the probate court.

64
Q

is duty to account waivable?

A

Yes by settlor or beneficiaries

65
Q

is duty to account waivable?

A

Yes by settlor or beneficiaries

66
Q

what is duty of prudent administration

A

The trustee has a duty to administer the trust as a prudent person and must exercise reasonable care, skill, and caution with regard to trust property.

  • separate personal property
  • duty to maintain
  • duty to secure possession
67
Q

powers of appointment

A

Usually given to a beneficiary, a power of appointment enables the holder to direct a trustee to distribute some or all of the trust property without regard to the provisions of the trust.

68
Q

trustee liability to beneficiaries

A

Enforcement by beneficiary: Lost profits, lost interests, and other losses resulting from a breach of trust are the responsibility of the trustee.

beneficiary may seek damages, removal of trustee

69
Q

co trustee liability

A

A co-trustee may be liable for breach for:

i) Consenting to the action constituting the breach;

ii) Negligently failing to act to prevent the breach;

iii) Concealing the breach or failing to compel redress; or

iv) Improperly delegating authority to a co-trustee.

70
Q

trustee liability for predecessor and successor trustees

A

If a trustee knew of his predecessor’s breach and failed to address it or was negligent in delivering the property, then the trustee will be liable for his predecessor’s breach. Successor trustees can maintain the same actions as the original trustees.

71
Q

trustee liability for agents

A

A trustee is not liable for breaches committed by an agent unless the trustee:

i) Directs, permits, or acquiesces in the agent’s act;

ii) Conceals the agent’s act;

iii) Negligently fails to compel the agent to redress the wrong;

iv) Fails to exercise reasonable supervision over the agent;

v) Permits the agent to perform duties that the trustee was not entitled to delegate; or

vi) Fails to use reasonable care in the selection or retention of agents.

72
Q

trustee liability to third parties

A

a trustee is personally liable on contracts entered into and for tortious acts committed while acting as trustee. If he acted within the scope of his duties, then he is entitled to indemnification from the trust.

73
Q

how can trustees resign?

A

A trustee may resign from the position by:

i) Providing at least 30 days’ notice to the qualified beneficiaries, the settlor (if living), and any co-trustees; or

ii) Obtaining court approval.

74
Q

removal of trustee

A

court has power if purposes of trust would be frustrated by trustee’s appointment or continuance in office

75
Q

reasons why a court may remove a trustee

A

i) The trustee becomes incapable of performing his duties;

ii) The trustee materially breaches one or more of his duties;

iii) A conflict of interest arises;

iv) A serious conflict between the trustee and one or more beneficiaries, or between co-trustees, develops; or

v) The trust is persistently performing poorly as a result of the trustee’s actions or inactions.

76
Q

gifts to surviving children

A

Under common law, if the beneficiary survives the settlor but predeceases distribution, the trust asset goes to the beneficiary’s estate.

Under the UPC, however, if he beneficiary survives the settlor but predeceases the distribution, the trust asset goes to the beneficiary’s issue.

MEE (V) (6 decks)

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