Trusts

Question 1

define: trust

Answer 1

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.

Question 2

three main types of trusts

Answer 2

express trusts, resulting trusts, constructive trusts

Question 3

trusts interests are

Answer 3

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

Question 4

trust is valid so long as it has…

Answer 4

a trustee, an ascertainable beneficiary, assets

Question 5

is consideration required?

Answer 5

no

Question 6

traditional vs. UTC approach: revocability of trusts

Answer 6

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

Majority now follows UTC

Question 7

mandatory vs discretionary trusts

Answer 7

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.

Question 8

what is bifurcated?

Answer 8

Title –

legal title goes to trustee
equitable title goes to beneficiary

Question 9

can someone by sole trustee and sole beneficiary?

Answer 9

No, this arrangement lacks enforcement power

Question 10

Named trustee: what qualifications?

Answer 10

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

Question 11

acceptance of trusteeship

Answer 11

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.

Question 12

will trust terminate automatically upon death of trustee?

Answer 12

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

Question 13

effect of failing to name a trustee

Answer 13

court will appoint

Question 14

express trust definition

Answer 14

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

Question 15

two categories of express trusts

Answer 15

private, charitable

Question 16

private express trust created only if:

Answer 16

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

Question 17

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

Answer 17

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

Question 18

trust property requirements

Answer 18

must be identifiable, trust property must be identifiable and segregated

Question 19

valid trust purpose

Answer 19

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

Question 20

elements of a valid private express trust

Answer 20

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

Question 21

exceptions to ascertainable beneficiaries requirement of private trust

Answer 21

unborn children, class-gift exception, charitable trusts exception

Question 22

2 types of express trusts

Answer 22

inter vivos, testamentary

Question 23

for a charitable trust to be valid, it must have

Answer 23

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]

Question 24

cy pres

Answer 24

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

Question 25

two types of remedial trusts

Answer 25

resulting trust, constructive trust

Question 26

what is a resulting trust

Answer 26

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.

Question 27

aim of resulting trust

Answer 27

prevention of unjust enrichment

Question 28

constructive trust

Answer 28

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

Question 29

how to secure a constructive trust?

Answer 29

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

Question 30

effect of constructive trust

Answer 30

plaintiff acquires the property itself

Question 31

defenses to claim seeking constructive trust

Answer 31

1) unclean hands 2) laches

Question 32

effect of gift over clause

Answer 32

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

Question 33

alienability of beneficiary's equitable interest

Answer 33

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

Question 34

support trust def

Answer 34

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

Question 35

can creditors reach the assets of a support trust?

Answer 35

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)

Question 36

standing of beneficiary of fully discretionary trust to sue

Answer 36

clear abuse of discretion by trustee

Question 37

define: discretionary trust

Answer 37

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

Question 38

mandatory trust

Answer 38

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

Question 39

spendthrift trust

Answer 39

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

Question 40

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

Answer 40

1) children, spouses entitled to support 2) orders of federal or state tax liens NOT bankruptcy

Question 41

methods of revocability

Answer 41

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.

Question 42

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

Answer 42

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

Question 43

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

Answer 43

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.

Question 44

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

Answer 44

unanticipated changes, inability to administer the trust effectively, trust is uneconomic Court may modify to correct mistakes or achieve settlor's tax objectives

Question 45

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

Answer 45

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

Question 46

allocating principal and income: traditional approach vs. modern approach

Answer 46

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

Question 47

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

Answer 47

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.

Question 48

unitrust

Answer 48

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.

Question 49

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

Answer 49

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.

Question 50

granting powers: modern trend

Answer 50

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.

Question 51

common trustee powers

Answer 51

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

Question 52

trustee duties (and objective/subjective)

Answer 52

loyalty (objective standard), good faith (subjective) duty of prudence inform and account duty of prudent administration

Question 53

what happens when trustee self deals?

Answer 53

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

Question 54

examples of self dealing

Answer 54

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.

Question 55

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

Answer 55

transaction must still be reasonable and fair

Question 56

Conflicts of interest that aren't self dealing -- what result?

Answer 56

reasonable and in good faith standard

Question 57

duty of prudence -- common law vs. modern law approach

Answer 57

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

Question 58

test for whether function is delegable by trustee

Answer 58

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

Question 59

what trust instruments can trustee invest in?

Answer 59

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

Question 60

modern portfolio approach

Answer 60

high risk investment can be offset by lower risk investment

Question 61

trustee duty to be impartial

Answer 61

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.

Question 62

what is trustee's duty to disclose?

Answer 62

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.

Question 63

what is trustee's duty to account?

Answer 63

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.

Question 64

is duty to account waivable?

Answer 64

Yes by settlor or beneficiaries

Question 65

is duty to account waivable?

Answer 65

Yes by settlor or beneficiaries

Question 66

what is duty of prudent administration

Answer 66

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

Question 67

powers of appointment

Answer 67

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.

Question 68

trustee liability to beneficiaries

Answer 68

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

Question 69

co trustee liability

Answer 69

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.

Question 70

trustee liability for predecessor and successor trustees

Answer 70

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.

Question 71

trustee liability for agents

Answer 71

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.

Question 72

trustee liability to third parties

Answer 72

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.

Question 73

how can trustees resign?

Answer 73

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.

Question 74

removal of trustee

Answer 74

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

Question 75

reasons why a court may remove a trustee

Answer 75

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.

Question 76

gifts to surviving children

Answer 76

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.