Trusts

Question 1

Types of trusts

Answer 1

Inter vivos trust
Testamentary trust

Question 2

Inter vivos trust (living trust)

Answer 2

An inter vivos trust is a trust created while the settlor is living and transfers some or all of their property into the trust. The settlor can designate themself as the trustee or a 3P.

Question 3

Testamentary trust

Answer 3

A testamentary trust is created in writing in a will or in a document incorporated by reference into a will. The will containing the trust must meet the attested or holographic will requirements.

Question 4

Elements to create a trust

Answer 4

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

Question 5

Intent element of creating a trust

Answer 5

Settlor may manifest intent orally, in writing, or by conduct. Manifestation of intent must occur prior to or simultaneously with transfer of property.

Question 6

Trust property element of creating a trust

Answer 6

The trust must be funded with identifiable trust property, described with reasonable certainty.

Question 7

Valid trust purpose element of creating a trust

Answer 7

A trust can be created for any purpose as long as it’s not illegal or contrary to public policy.

Question 8

Ascertainable beneficiaries element of creating a trust

Answer 8

The beneficiaries must be identifiable

Question 9

Exceptions to the ascertainable beneficiaries element of creating a trust

Answer 9

Class gifts: Trusts for a reasonably definite class will be upheld.

Charitable trusts: Trusts that exist for the good of the public do not need ascertainable beneficiaries.

Question 10

Omitted children of trusts

Answer 10

A child omitted from the trust can force a share of the trust assets if 1) the child is born/adopted after trust is created, 2) settlor mistakenly believed the child was dead, or 3) settlor didn’t know the child existed.

Question 11

Exceptions to omitted children of trusts

Answer 11

Cannot force a share if the child is either 1) provided for outside of the trust, or 2) the settlor had other children when the trust was executed and left a substantial amount of their estate to the omitted child’s parent.

Question 12

Undue influence in creating trust

Answer 12

Undue influence is when a 3P exerts significant coercion upon the settlor with the intent to improperly influence the settlor’s judgment. If undue influence is shown, the trust may be invalidated in whole or in part.

Question 13

Approaches to showing undue influence in creating trust

Answer 13

Traditional approach
Confidential relationship

Question 14

Traditional approach of undue influence in creating a trust

Answer 14

contestant must show 1) susceptibility, 2) motive, 3) opportunity, and 4) causation.

Question 15

Confidential relationship approach of undue influence in creating a trust

Answer 15

a presumption of undue influence arises when 1) principal beneficiary has a confidential relationship with the settlor, 2) principal beneficiary participated in executing the trust, and 3) gift to beneficiary is unnatural. If the presumption arises, the beneficiary must show through clear and convincing evidence that they did not exercise undue influence.

Question 16

Fraud in creating trust

Answer 16

Fraud is an intentional misrepresentation with the intent to deceive and improperly influence the settlor’s judgment

Question 17

Types of fraud in creating trust

Answer 17

Fraud in the inducement
Fraud in the execution

Question 18

Fraud in the inducement

Answer 18

Fraud in the inducement occurs when a misrepresentation causes the settlor to make a different trust than they otherwise would’ve made.

Question 19

Fraud in the execution

Answer 19

Fraud in the execution occurs when the misrepresentation is about the trust itself or its contents.

Question 20

Charitable trust requirements

Answer 20

A charitable trust must have 1) a charitable purpose, and 2) indefinite beneficiaries (community at large). If a charity fails to follow the trust terms, the trustee can sue for the return of the funds.

Question 21

Cy pres doctrine

Answer 21

Courts may modify a charitable trust to seek an alternative charitable purpose if the original charity becomes illegal, impracticable, or impossible to perform. Whether the court can modify the charitable trust depends on specific or general intent by the settlor.

Question 22

Cy pres doctrine - specific intent found

Answer 22

If there is specific intent, the court may not modify the trust and the trust is terminated and becomes a resulting trust.

Question 23

Cy pres doctrine - general intent found

Answer 23

If there is general intent, the court will substitute a similar charity.

Question 24

Income beneficiary

Answer 24

An income beneficiary receives income from the trust.

Question 25

Remainder beneficiary

Answer 25

A remainder beneficiary is entitled to the trust principal upon termination of the trust.

Question 26

Lapse

Answer 26

Under CL, if a beneficiary dies before the settlor the gift to the beneficiary lapses (fails).

Question 27

Anti-lapse

Answer 27

under modern anti-lapse statutes, if the beneficiary was blood-related to the settlor the beneficiary’s child will take the gift.

Question 28

Class gift exception to anti-lapse

Answer 28

If the trust beneficiaries are a class, only the members of the class who are alive at the time of the trust execution will receive the benefit of the trust.

Question 29

Discretionary trust

Answer 29

For a discretionary trust, the trustee is given complete discretion to apply payments of income or principal to the beneficiary. Creditors have the same rights as a beneficiary if the trustee exercises discretion to pay.

Question 30

Mandatory trust

Answer 30

For a mandatory trust, the trust governs when and how trust property is to be distributed and the trustee has no discretion.

Question 31

Alienability of trust interest

Answer 31

A beneficiary can assign their interest in trust property to 3P. Interest is freely alienable unless barred by a statute or spendthrift provision.

Question 32

Support trust

Answer 32

A support trust directs the trustee to pay income or principal as necessary to support the beneficiary. Creditors cannot reach these assets unless they are providing a necessity to the beneficiary.

Question 33

Spendthrift trust

Answer 33

A spendthrift provision expressly restricts the beneficiary’s power to voluntarily or involuntarily transfer interest. Creditors usually cannot reach the trust interest unless money is owed for child or spousal support, basic necessities, or tax lien holders.

Question 34

Revocable trust

Answer 34

In CA, trusts are presumed revocable. With revocable trusts, settlors have the right to modify or terminate the trust.

Question 35

Irrevocable trust

Answer 35

With irrevocable trusts, modification/termination while the settlor is still alive can occur if 1) consent of all beneficiaries, and 2) proposed change does not interfere with the primary purpose of the trust.

Question 36

Methods of termination of trust

Answer 36

Express condition in trust has been met

Trust purpose accomplished: Trusts will automatically terminate when the trust purpose has been accomplished.

Consent: A trust can be terminated if all beneficiaries consent. However, a trustee can block termination by the beneficiaries if the trust is shown to have an unfulfilled material purpose.

Court: A court can terminate a trust if its purpose has become illegal, impracticable, or impossible.

Question 37

Trustee’s power to terminate trust

Answer 37

A trustee does not have power to terminate a trust unless the trust expressly says so.

Question 38

Removal of trustee

Answer 38

A court can remove a trustee if the purpose of the trust would be frustrated by the trustee’s continued position or if the trustee violated a fiduciary duty.

Question 39

Trustee’s powers

Answer 39

The trustee has powers granted expressly in the trust and powers necessary to act as a reasonably prudent person managing the trust. This includes implied powers to contract, sell, lease, or transfer trust property.

Question 40

Trustee’s fiduciary duties

Answer 40

Duty of care
Duty of loyalty

Question 41

Trustee duty of care

Answer 41

Trustees have a general duty to act with a duty of care in administering the trust.

Question 42

Trustee duty of care - Investment rules

Answer 42

Prudent investor rule
Duty to diversity

Question 43

Trustee duty of care - prudent investor rule

Answer 43

Under the prudent investor rule, a trustee must act as a prudent investor would act when investing their own property (less risk).

Question 44

Trustee duty of care - duty to diversify

Answer 44

Under the duty to diversify, a trustee must adequately diversify the trust investments to spread the risk of loss, but not if administrative costs outweigh the benefits.

Question 45

Trustee duty of care - Duty to make property productive

Answer 45

A trustee has a duty to make a productive economic use of trust property. This includes pursuing all possible claims, maximizing investments, selling assets when appropriate, securing insurance, and paying property expenses.

Question 46

Trustee duty of care - Duty to be impartial

Answer 46

Under the duty to be impartial, a trustee must balance the interests of the present beneficiaries meaning the trustee cannot favor one present beneficiary over the others unless the trust provides for it. Additionally, the trustee must balance the interests of the present and future beneficiaries by investing property so it produces a reasonable income for the present beneficiaries while preserving the principal for the remainder beneficiaries.

Question 47

Trustee duty of loyalty

Answer 47

Trustees have a general duty of loyalty to administer the trust in good faith (subjective standard) and to act reasonably (objective standard) in managing the trust.

Question 48

Trustee duty of loyalty - Self dealing

Answer 48

When the trustee personally engages in a transaction involving trust property, a conflict of interest arises between the trustee’s duties to the beneficiaries and their own personal interest. Self-dealing is considered a per se breach of the duty of loyalty. Even when the self-dealing is authorized, the transaction must still be reasonable and fair to avoid breach.

Question 49

Trustee duty of loyalty - Duty to disclose

Answer 49

Under the duty of loyalty, a trustee has the duty to disclose complete and accurate info about the trust property. A trustee must allow access to trust records and accounts.

Question 50

Trustee duty of loyalty - Duty to account

Answer 50

Under the duty of loyalty, a trustee has the duty to account for actions taken on behalf of the trust so that the trustee’s performance can be assessed against the terms of the trust.

Question 51

Remedies for trustee’s breach of fiduciary duties

Answer 51

When a trustee violates their duties, beneficiaries may sue the trustee and seek damages or removal of the trustee.